COST ACCOUNTING
PERFORMANCE MEASUREMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A company has cost of debt of 6% and cost of equity of 15%. In this country, the corporate income tax rate is 20%. If the company has target debt to total capital ratio of 40%, its WACC is closest to:
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10.9%
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11.4%
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8.88%
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9.6%
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Explanation:
Detailed explanation-1: -The correct answer is c) 10.45% . Given, 65% debt with 8% after tax cost of debt and 35% equity with 15% cost of equity: The weighted average cost of capital is given as: Weighted Average Cost of Capital = ( Weight of Debt * Cost of Debt ) + ( Weight of Equity * Cost of Equity )
Detailed explanation-2: -Take the weighted average current yield to maturity of all outstanding debt then multiply it one minus the tax rate and you have the after-tax cost of debt to be used in the WACC formula.
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