A firm’s cost of debt is 9% before taxes, cost of equity is 12% before taxes, the tax rate is 40% and debt to equity is 2/3, what is the firm’s WACC?

Where:

Re = cost of equity

Rd = cost of debt

E = market value of the firm's equity

D = market value of the firm's debt

V = E + D

E/V = percentage of financing that is equity

D/V = percentage of financing that is debt

Tc = corporate tax rate

So,

WACC=1/3*12% +2/3*9%*(1-40%)

=4%+6%*0.60

=7.6%

c.9.36%

WACC = [ke x E/(E + D)] + [kd x D/(E + D) x (1 - T)

Where ke  is cost of equity

kd is cost of debt

E is equity amount

D is debt amount

T is tax rate, which affect debt instruments based on the interest to be paid on them by the company

WACC = [.12 x3/(3+2)] + [.09 x2/(3+2) x (1 - .40)]

            =0.072 +0.0216

            =0.0936 = 9.36%

WACC=Ke*Ve/Ve+Vd+Kd*(1-t)/Ve+Vd

Where Ve is market value of Equity

              Ve is Mv of debt

             Ke and Ke is cost of equity and debt respectively and t is tax rate payed by company

so after putting values in above equation we get the desire answer

answer9.36--------------------------------------------------------------------------------------------

•            = (3/5*12%)+(2/5*(9%-9%*0.4))

             =7.2% +2.16% =9.36% (C)

WACC =9.36%

Option C is the right answer

Option-C is the right answer.

7.6% as calculated below-

WACC=9%X(1-0.4)X2/3+12%X1/3

weighted average cost of capital =  debit2/3*%90+eguity1/3*%12*(1-.40%tax)=(5.99%+*3.99%)*60%=6%

wacc=6%

Answer is C

WACC for Debt is2.16%

WACC for equity is7.2%