A firm is 40% financed by debt with a yield-to-maturity of 8.5%. The equity has a beta of 1.3, the market risk premium is 8.4% and the risk-free rate is 3.8%. What is the firm's WACC if the tax rate is 34%

11.076%

Explanation:

The computation of the WACC is shown below:

= Weightage of debt * cost of debt * (1 - tax rate) + (Weightage of common stock) * (cost of common stock)

= (0.40 * 8.5%) * (1 - 34%) + (0.60 * 14.72%)

= 2.244% + 8.832%

= 11.076%

The cost of common stock is

= Risk free rate of return + Beta * market risk premium

= 3.8% + 1.3 * 8.4%

= 3.8% + 10.92%

= 14.72%