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Weighted Average Cost of Capital

The current interest rate on new debt is9%. The firm's marginal tax rate is 40%. It's capital structure, considered to be optimal, is as follows:

Debt $104,000,000
Common equity $156,000,000
Total liabilities and equity $260,000,000

A. Calculate Foust's after-tax cost of new debt and common equity. Calculate the cost of equity as D1/P0+g.

B. Find Foust's weighted average cost of capital.

Solution Preview

Cost of Common Equity = D1/Po+g = (8.42/65)+.08=20.95%
After Tax ...

Solution Summary

The solution explains the calculation of WACC