Hartley psychiatric, inc., needs to purchase office equipment for its 2,000 drive-in therapy centers nationwide. the total cost of the equipment is $2,000,000. it is estimated that the aftertax cash inflows from the project will be $210,000 annually forever. hartley has a debt-to-value ratio of 60 percent. the firm's cost of equity is 13 percent and its pre-tax cost of debt is 8 percent. the tax rate is 34 percent. what is hartley's weighted average cost of capital (wacc)? a) 6.09 percentb) 8.37 percentc) 8.95 percentd) 9.05 percente) 9.91 percent

None of the above

The weighted average cost of capital is 10.8%

Explanation:

The formula for calculating the weighted average flotation costs is

fA = fE x RE + fD x RD x (1-Tc)

Where fA is the weighted average flotation cost

fE is the flotation cost of equity = 8%

fD is the flotation cost of debt =2%

RE is the cost of equity = 13%

RD is the cost of debt = 8%

Tc is the tax rate = 34%

Substituting these values in the above equation, we get

fA = 0.08 x 0.13 + 0.02 x 0.08 x (1-0.34)

= 0.0104 + 0.001056

= 0.11456 or 11.456%

Therefore, the weighted average flotation cost are 11.456%

Givent he debt-equity ratio is 60% or 0.6

We know that Debt + Equity = 100% or 1.0

The value of debt(D/V) = 0.6 / 1.60 = 0.375

The value of equity (E/V) = 1 / 1.60 = 0.625

Calculating the weighted average cost of capital

WACC = (E/V) x RE + (D/V) x RD x (1 - Tc)

         = 0.625 x 0.13 + 0.375 x 0.08 x 0.66

         = 0.09282 + 0.0151

         = 0.10792 or 10.792%

Therefore, the weighted average cost of capital is 10.8%

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