{"id":202585,"date":"2025-03-17T17:25:25","date_gmt":"2025-03-17T17:25:25","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=202585"},"modified":"2025-03-17T17:25:27","modified_gmt":"2025-03-17T17:25:27","slug":"afirm-requires-an-investment-of-40000-and-borrows-10000-at-8","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/03\/17\/afirm-requires-an-investment-of-40000-and-borrows-10000-at-8\/","title":{"rendered":"Afirm requires an investment of $40,000 and borrows $10,000 at 8%"},"content":{"rendered":"\n<p>Afirm requires an investment of $40,000 and borrows $10,000 at 8%. If the retum on equity is 20%, what is the firm&#8217;s pre-tax WACC? <\/p>\n\n\n\n<p> A. 17% <\/p>\n\n\n\n<p>B. 18% <\/p>\n\n\n\n<p> C. 14% <\/p>\n\n\n\n<p>D. 16% <\/p>\n\n\n\n<p> E. 15%<\/p>\n\n\n\n<p><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-ast-global-color-6-color\"><strong>The correct answer and explanation is :<\/strong><\/mark><\/p>\n\n\n\n<p>To find the firm&#8217;s pre-tax <strong>Weighted Average Cost of Capital (WACC)<\/strong>, we can use the following formula:<\/p>\n\n\n\n<p>[<br>\\text{WACC} = \\left( \\frac{E}{V} \\times Re \\right) + \\left( \\frac{D}{V} \\times Rd \\times (1 &#8211; Tc) \\right)<br>]<\/p>\n\n\n\n<p>Where:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>( E ) = equity value<\/li>\n\n\n\n<li>( D ) = debt value<\/li>\n\n\n\n<li>( V ) = total value of the firm (equity + debt)<\/li>\n\n\n\n<li>( Re ) = return on equity (ROE)<\/li>\n\n\n\n<li>( Rd ) = cost of debt<\/li>\n\n\n\n<li>( Tc ) = corporate tax rate (but since we are calculating pre-tax WACC, this is omitted)<\/li>\n<\/ul>\n\n\n\n<p>Given:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Total investment = $40,000 (this is the firm\u2019s total value, ( V ))<\/li>\n\n\n\n<li>Debt (( D )) = $10,000<\/li>\n\n\n\n<li>Equity (( E )) = $40,000 &#8211; $10,000 = $30,000<\/li>\n\n\n\n<li>Return on equity (( Re )) = 20%<\/li>\n\n\n\n<li>Cost of debt (( Rd )) = 8%<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Step 1: Calculate the firm&#8217;s total value (( V ))<\/h3>\n\n\n\n<p>[<br>V = E + D = 30,000 + 10,000 = 40,000<br>]<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Step 2: Calculate the proportions of debt and equity<\/h3>\n\n\n\n<p>[<br>\\frac{E}{V} = \\frac{30,000}{40,000} = 0.75<br>]<br>[<br>\\frac{D}{V} = \\frac{10,000}{40,000} = 0.25<br>]<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Step 3: Apply these values to the WACC formula<\/h3>\n\n\n\n<p>Since we are looking for the <strong>pre-tax<\/strong> WACC, we don&#8217;t need to adjust for taxes:<br>[<br>\\text{WACC} = \\left( 0.75 \\times 20\\% \\right) + \\left( 0.25 \\times 8\\% \\right)<br>]<br>[<br>\\text{WACC} = 0.75 \\times 0.20 + 0.25 \\times 0.08<br>]<br>[<br>\\text{WACC} = 0.15 + 0.02 = 0.17<br>]<\/p>\n\n\n\n<p>So, the pre-tax WACC is <strong>17%<\/strong>.<\/p>\n\n\n\n<p>Thus, the correct answer is:<\/p>\n\n\n\n<p><strong>A. 17%<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Explanation:<\/h3>\n\n\n\n<p>WACC is the weighted average cost of capital for the firm, considering the costs of debt and equity in proportion to the total capital structure. The firm&#8217;s equity is 75% of the capital structure, and the debt is 25%. The WACC is influenced by the return the firm generates on equity (20%) and the cost it pays on debt (8%). By multiplying the cost of equity and debt by their respective weights and summing them, we find that the firm\u2019s pre-tax WACC is 17%.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Afirm requires an investment of $40,000 and borrows $10,000 at 8%. If the retum on equity is 20%, what is the firm&#8217;s pre-tax WACC? A. 17% B. 18% C. 14% D. 16% E. 15% The correct answer and explanation is : To find the firm&#8217;s pre-tax Weighted Average Cost of Capital (WACC), we can use [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-202585","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/202585","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=202585"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/202585\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=202585"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=202585"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=202585"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}