Suppose that JB Cos. has a capital structure of 75 percent equity, 25 percent de
ID: 2743107 • Letter: S
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