Suppose Simmons' common stock has a beta of 1.37, the risk-free rate is 3.4 percent, and the market risk premium is 8.2 percent. The yield to maturity on the firm's bonds is 7.6 percent and the debt-equity ratio is .45. What is the WACC if the tax rate is 23 percent and all interest is tax deductible?

The WACC or weighted average cost of capital is the rate of return that a business is expected to pay to all of its security holders- bonds, common stock, preferred stock- or is the cost of capital for the business.

To calculate the WACC, we use the following formula,

WACC = D/A * (1-tax rate) * rD + E/A * rE

Where,

D/A and E/A is the weightage of debt and assets as a proportion of total assets
rD * (1-tax rate) is the after tax cost of debt
rE is the cost of equity or required rate of return on equity

We first need to calculate the required rate of return on equity (r). We will use the CAPM formula for r.

r = 0.034 + 1.37 * 0.082

r = 0.14634 or 14.634%

The total assets are equal to,

Assets = Debt + Equity

If for every $1 of equity, there is $0.45 of debt as given by debt-equity ratio.

Then,

Assets = 0.45 + 1

Assets = $1.45

WACC = 0.45/1.45 * (1-0.23) * 0.076 + 1/1.45 * 0.14634

WACC = 0.11908 or 11.908% rounded off to 11.91%

andromache andromache · Answer 2 · 2022-04-05T14:53:11+02:00

The WACC of the firm in the case when the tax rate is 23 percent is 11.91%.

Calculation of the WACC:

We know that

WACC = D/A * (1-tax rate) * rD + E/A * rE

here,

D/A and E/A are the weightage of debt and assets as a proportion of total assets

rD * (1-tax rate) is the after tax cost of debt

rE is the cost of equity or required rate of return on equity

First determine the r

So,

r = 0.034 + 1.37 * 0.082

r = 0.14634 or 14.634%

Now we know that

The total assets are equal to,

Assets = Debt + Equity

So,

Assets = 0.45 + 1

Assets = $1.45

Now finally

WACC = 0.45/1.45 * (1-0.23) * 0.076 + 1/1.45 * 0.14634

WACC = 0.11908 or 11.908%

= 11.91%

learn more about WACC here: https://brainly.com/question/24335235