We appreciate your visit to Suppose that JB Cos has a capital structure of 70 percent equity and 30 percent debt The before tax cost of debt is 11 percent. This page offers clear insights and highlights the essential aspects of the topic. Our goal is to provide a helpful and engaging learning experience. Explore the content and find the answers you need!
Answer :
JB Cos.'s WACC is 12.975%, rounded to 2 decimal places.
The Weighted Average Cost of Capital (WACC) is a financial metric that represents the average cost of financing a company's operations, taking into account the proportion of equity and debt in its capital structure. To calculate JB Cos.'s WACC, we need to consider the cost of equity, the cost of debt, and the weight of each component in the capital structure.
Given that JB Cos. has a capital structure of 70 percent equity and 30 percent debt, we can calculate the weighted cost of equity and the weighted cost of debt.
Step 1: Calculate the weighted cost of equity
The weighted cost of equity is calculated by multiplying the cost of equity by the weight of equity in the capital structure.
Weighted cost of equity = Cost of equity × Weight of equity
= 15% × 70%
= 10.5%
Step 2: Calculate the weighted cost of debt
The weighted cost of debt is calculated by multiplying the before-tax cost of debt by (1 - tax rate) and then multiplying it by the weight of debt in the capital structure.
Weighted cost of debt = Before-tax cost of debt × (1 - Tax rate) × Weight of debt
= 11% × (1 - 25%) × 30%
= 2.475%
Step 3: Calculate the WACC
The WACC is calculated by adding the weighted cost of equity and the weighted cost of debt.
WACC = Weighted cost of equity + Weighted cost of debt
= 10.5% + 2.475%
= 12.975%
Therefore, JB Cos.'s WACC is 12.975%, rounded to 2 decimal places.
Learn more about WACC from the given link:
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