1. With the information below, calculate the WACC (weighted average cost of capital).

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The company projected its earnings before interest and taxes to be $12 million for the next year with projected tax rate to be 40%. The companys cost of equity was 16%. The company could issue at least $30 million of long-term debt at a cost of 9%. Currently, 75% of the equity has been issued. It has been determined that a good approximation of personal tax rate on debt income was 28% and for stock income was 20%. The following estimates were developed showing the cost of debt and cost of equity that included an increasing premium for financial distress and agency costs as the debt ratio increases.

Debt ratio kd ks

0% ---- 16.0%

10% 9.00% 17.0%

20% 9.25% 17.8%

30% 9.75% 19.0%

40% 10.50% 20.5%

50% 12.00% 22.0%

60% 15.00% 26.0%

70% 20.00% 30.0%

80% 30.00% 40.0%

90% 50.00% 60.0%