Suppose that JB Cos. has a capital structure of 75 percent equity, 25 percent de

Question

Suppose that JB Cos. has a capital structure of 75 percent equity, 25 percent debt, and that its before-tax cost of debt is 14 percent while its cost of equity is 18 percent. Assume the appropriate weighted-average tax rate is 25 percent.

What will be JB’s WACC? (Round your answer to 2 decimal places.)

Suppose that JB Cos. has a capital structure of 75 percent equity, 25 percent debt, and that its before-tax cost of debt is 14 percent while its cost of equity is 18 percent. Assume the appropriate weighted-average tax rate is 25 percent.

Explanation / Answer

Solution.

Calculation of WACC.

Cost of debt = 14% ( 1- .25 ) = 10.50%

Cost of Equity = 18%

Capital Weight Cost WACC Equity 0.75 10.50%                  0.079 Debt 0.25 18%                  0.045 Total                0.1238

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