Posted: March 24th, 2017

Calculate the firm’s weighted average cost of capital where the firm’s borrowing rate on debt is 8%, it faces a 40% tax rate, and the common stockholders require a 20% rate of return.

14–21. (Weighted average cost of capital) In the spring of last year Tempe Steel learned that the firm would need to re-evaluate the company’s weighted average cost of capital following a significant issue of debt. The firm now has financed 45% of its assets using debt and 55% using equity. Calculate the firm’s weighted average cost of capital where the firm’s borrowing rate on debt is 8%, it faces a 40% tax rate, and the common stockholders require a 20% rate of return.