To calculate the firm's weighted average cost of capital (WACC), we can use the following formula:
\[ \text{WACC} = \left( \frac{E}{V} \times r_e \right) + \left( \frac{D}{V} \times r_d \times (1 - T) \right) \]
Where:
- \(E\) = market value of equity
- \(D\) = market value of debt
- \(V\) = \(E + D\) = total market value of the firm's financing (equity + debt)
- \(r_e\) = cost of equity
- \(r_d\) = pre-tax cost of debt
- \(T\) = marginal tax rate
From the information provided, we have:
- \(E/V = 67.00% = 0.67\)
- Therefore, \(D/V = 1 - E/V = 1 - 0.67 = 0.33\)
- \(r_e = 18.00% = 0.18\)
- \(r_d = 8.00% = 0.08\)
- \(T = 21.00% = 0.21\)
Now, substituting these values into the WACC formula:
- Calculate the equity contribution:
\[ \frac{E}{V} \times r_e = 0.67 \times 0.18 = 0.1206 \]
- Calculate the debt contribution (after tax):
\[ \frac{D}{V} \times r_d \times (1 - T) = 0.33 \times 0.08 \times (1 - 0.21) \] \[ = 0.33 \times 0.08 \times 0.79 = 0.020832 \]
- Add the two components to get WACC:
\[ \text{WACC} = 0.1206 + 0.020832 = 0.141432 \]
Converting back to percentage:
\[ \text{WACC} = 14.14% \]
Thus, the firm's weighted average cost of capital (WACC) is approximately 14.14%.