Filter Corp. maintains a debt-equity ratio of .45. The cost of equity is 14.7 percent, the pretax cost of debt is 8.1 percent, and the marginal tax rate is 34 percent. What is the weighted average cost of capital?

The weighted average cost of capital is 11.80%.

Weighted average cost of capital:

Weighted average cost of capital= (0.45 / 1.45) x (0.081) x (1-0.34) + (1/1.45) x (0.147)

Weighted average cost of capital= 0.01659 + 0.10138

Weighted average cost of capital=.1180×100

Weighted average cost of capital=11.80%

Inconclusion the weighted average cost of capital is 11.80%.

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11.78%

Explanation:

Weighted average cost of capital WACC determines firms cost of capital. It includes all sources of finance which are included in firms capital structure. The WACC is calculated with given formula:  

WACC = E/V Re + D/V * Rd (1 - T)

Re = cost of equity

V = Firms Market value of Debt and Equity

Rd = Cost of debt

E = market value of equity

D = market value of debt

T = Marginal Tax rate

WACC = 14.7 * 1 / 1.45 + 8.1 * 0.45 / 1.45 (1 - .34)

WACC = .1013 + 0.0165

WACC = 11.78%

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