Question

Munding corp. has debt with a market value of $23 million and equity with a market value of$46 million. its pre-tax cost of debt is 5.4% and its cost of equity is 11%. the firm’s marginal tax rate is 21%.

Answers

1. The value of the weighted average cost of capital of the firm is 8.8%.
According to the statement
we have to compute the weighted average cost of capital of the firm.
And for this purpose,
The given information is:
debt with market value = $23 million and equity with market value =$46
Pre-tax cost debt = 5.4%
Cost of equity = 11% and marginal tax rate is 21%
So, The formula to find weighted average cost:
WACC = weight in equity × cost of equity + weight in debt × cost of debt × (1-tax rate)
Substitute the values in it then
Here weight in equity become = 46/(23+46)
weight in equity = 46/69
And
weight in debt = 23/69.
So, put the values then
WACC = 46/69 × 0.11 + 23/69 × 0.054 × (1 – 0.21)
WACC = 0.67 × 0.11 +  0.34 × 0.054 × (1 – 0.21)
WACC = 0.0737 + 0.01836 (0.79)
WACC = 0.0737 + 0.0145
WACC = 0.0882
WACC = 8.8%
So, The value of the weighted average cost of capital of the firm is 8.8%.
Learn more about weighted average cost here
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