Use the following information to answer the question(s)below.
Luther Industries has 25 million shares outstanding trading at $18 per share.In addition,Luther has $150 million in outstanding debt.Suppose Luther's equity cost of capital is 13%,its debt cost of capital is 7%,and the corporate tax rate is 21%.
-Luther's weighted average cost of capital is closest to:
A)9.8%.
B)10.8%.
C)11.1%.
D)13.0%.

Question

Quizplus · Accepted Answer

First, we need to calculate the weight of equity and debt in Luther's capital structure:

Weight of Equity = Number of Shares outstanding x Market price per Share / Total Market Value of the Firm
= 25,000,000 x $18 / ($450,000,000 + $150,000,000) = 0.714

Weight of Debt = Total Debt / Total Market Value of the Firm
= $150,000,000 / ($450,000,000 + $150,000,000) = 0.286

Next, we can use the formula for calculating WACC:

WACC = Weight of Equity x Cost of Equity + Weight of Debt x Cost of Debt x (1 - Corporate Tax Rate)

= 0.714 x 13% + 0.286 x 7% x (1 - 21%)

= 9.25% + 0.56% = 9.81% (rounded to two decimal places)

Therefore, the closest answer is 11.1%.

Use the Following Information to Answer the Question(s)below