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The following data pertains to Xena Corp.: Xena Corp. Total Assets $23,610 Interest-Bearing Debt (market value) $11,070 Average borrowing rate for debt 10.2% Common Equity: Book Value $ 6,150 Market Value $25,830 Marginal Income Tax Rate 37% Market Beta 1.73 Determine the weight on equity capital that should be used to calculate Xena's weighted-average cost of capital. Select one:

A. 73.8%
B. 70.0%
C. 24.0%
D. 38.7%

Respuesta :

Answer:

Option (B) is correct.

Explanation:

Given that,

Total Assets = $23,610

Interest-Bearing Debt (market value) = $11,070

Average borrowing rate for debt = 10.2%

Common Equity:

Book Value = $6,150

Market Value = $25,830

Marginal Income Tax Rate = 37%

Market Beta = 1.73

Hence,

Weight on equity capital = Equity ÷ (Debt + Equity)

                                         = 25,830 ÷ (11,070 + 25,830)

                                         = 25,830 ÷ 36,900

                                         = 70%

Therefore, the weight on equity capital is 70%.

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