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XYZ Corporation's capital structure consists of 60% debt (with a pretax cost of 10%), and the balance of common equity (with a cost of 12%). The company's income tax rate (federal and state combined), t, is 40%. XYZ's weighted-average cost of capital (WACC), to one decimal point, is:

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Answer:

Weighted Average Cost of Capital = 8.40%

Explanation:

Weights of Debt = 60%

Weight of Equity = (100% - 60%) = 40%

Pretax Cost of Debt = 10%

Tax Rate = 40%

After Tax Cost of Debt = ( 100% - 40% ) x 10% = 6%

Cost of Equity = 12%

Weighted Average Cost of Capital = Weight of Debt x After tax cost of Debt + Weight of Equity x Cost of Equity

WACC = 60% x 6% + 40% x 12% = 8.40%

Tundexi

XYZ's WACC is 8.4%

Let understand that Weighted Average Cost of capital is the rate used for calculation of the Net Present Value for a firm.

  • WACC is the acronym for Weighted Average Cost of capital

  • The formulae for WACC is Weight of debt × cost of debt (1-tax) + Weight of equity × Cost of equity

WACC = 0.60 x [10%x(1 - 0.40)} + 0.40*12%

WACC = 0.60 x 0.06 + 0.048

WACC = 0.036 + 0.048

WACC = 0.084

WACC = 8.4%

In conclusion, the WACC for XYZ is 8.4%.

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