Kelso\'s has a debt-equity ratio of 0.6 and a tax rate of 35 percent. The firm d

Question

Kelso's has a debt-equity ratio of 0.6 and a tax rate of 35 percent. The firm does not issue preferred stock. The cost of equity is 14.5 percent and the aftertax cost of debt is 4.8 percent. What is the weighted average cost of capital? A 10.46 percent B 10.67 percent C 10.86 percent D 11.38 percent E 11.57 percent

Explanation / Answer

given, D/E = 0.6 =>D/E + 1 = 1.6 =>D+E/E = 1.6 => E/D+E = 1/1.6 = 0.625 =>D/D+E = 1- 0.625 = 0.375 => WACC = (E/D+E)*(cost of equity)+(D/D+E)*(after-tax cost of debt) =>WACC = (0.625)(14.5%)+(0.375)(4.8%) =>WACC = 10.86% ans :C

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