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

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%.

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