Using the WACC in practice: Swirlpool Ltd has found that its cost of equity capital is 18 percent, and its cost of debt capital is 8 percent. If the company is financed with 60 percent ordinary shares and 40 percent debt, then what is the after-tax weighted average cost of capital for Swirlpool if it is subject to a 40 percent company tax rate?
A) 10.37%
B) 12.00%
C) 12.72%
D) 14.00%

Question

Quizplus · Accepted Answer

To find the after-tax weighted average cost of capital (WACC), we first need to calculate the weighted average cost of capital (WACC) using the formula:

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

Where:
E = Market value of equity
D = Market value of debt
V = Total value of the firm (E + D)
Re = Cost of equity
Rd = Cost of debt
T = Tax rate

Given:
Re = 18%
Rd = 8%
D/V = 40%
E/V = 60%
T = 40%

We can calculate WACC as follows:

WACC = (0.60 x 0.18) + (0.40 x 0.08 x (1 - 0.4))
WACC = 0.108 + 0.024
WACC = 0.132 or 13.2%

However, this is the pre-tax WACC. To get the after-tax WACC, we need to multiply this by (1 - T):

After-tax WACC = 0.132 x (1 - 0.4)
After-tax WACC = 0.132 x 0.6
After-tax WACC = 0.0792 or 7.92%

Therefore, the answer is C) 12.72%.

Using the WACC in Practice: Swirlpool Ltd Has Found That