Question
Asked Oct 25, 2019

a firm has a debt-to-equity ratio of 1.0. if we assume that the firm's debt pays 11% interest annualy, the equity has a 19% annual return, and the tax rate is 40%, then what is the firms WACC?

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Expert Answer

Step 1

Hence, cost of debt after tax is 6.6%.

The cost of debt is determined by multiplying cost of debt before tax with tax ...

Cost of debt after tax Cost of debt before tax x Tax shield
=(11%-40%11)
=6.6%
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Cost of debt after tax Cost of debt before tax x Tax shield =(11%-40%11) =6.6%

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