A company has debt 40%, equity 60%. Pre-tax cost of debt 6%, cost of equity 12%, tax rate 30%. What is the after-tax weighted average cost of capital (WACC)?

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Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

Multiple Choice

A company has debt 40%, equity 60%. Pre-tax cost of debt 6%, cost of equity 12%, tax rate 30%. What is the after-tax weighted average cost of capital (WACC)?

WACC is the blended cost of financing the firm, combining the after‑tax cost of debt with the cost of equity in proportion to their weight in the capital structure. Since interest on debt is tax-deductible, you use the after‑tax cost of debt: Rd × (1 − T). Here, after-tax debt cost = 6% × (1 − 0.30) = 4.2%. With 60% equity and 40% debt, WACC = 0.60 × 12% + 0.40 × 4.2% = 7.2% + 1.68% = 8.88%. The after-tax WACC is 8.88%.

A company has debt 40%, equity 60%. Pre-tax cost of debt 6%, cost of equity 12%, tax rate 30%. What is the after-tax weighted average cost of capital (WACC)?

Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

A company has debt 40%, equity 60%. Pre-tax cost of debt 6%, cost of equity 12%, tax rate 30%. What is the after-tax weighted average cost of capital (WACC)?

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