Corporate Finance Q74

0. A.F. Company has a debt to equity ratio of 60% and is subject to taxation at a rate of 40%. Its cost of equity is 17% while its cost of debt is 12.5%. A.F. Company’s weighted average cost of capital is closest to:

Answer
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Option : B
Explanation : Wd = (D/E) / (1 + D/E) = 0.6 / (1 + 0.6) = 0.375
We = 1 - Wd = 1 – 0.375 = 0.625
WACC = Wd Rd (1 - t) + We Re
= 0.375 * 0.125 * (1 – 0.4) + 0.625 * 0.17 = 13.44%.

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