What is the weighted average cost of capital (WACC) for ABC Limited which has the following capital structure? $5m of equity wit

Question

2 years ago

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h a cost of equity of 15%; $2m of mezzanine finance with a cost of 9.5%; $1m of senior debt with a cost of debt of 7%.

1 answer:

katrin2010 [14] · Answer 1 · 2023-07-06T14:19:23+03:00

The weighted average cost of capital (WACC) for ABC Limited is 12.63%

The weighted average cost of capital(WACC) of a firm is the average cost of finance incurred by the firm on all its sources of finance.

It is determined as the sum of the cost of each source of finance multiplied by their respective weights in the firm's capital structure.

By weights, I mean the percentage of funding each source contributes to the total finance available at the firm's disposal.

WACC=(weight of equity*cost of equity)+(weight of mezzanine finance*cost of mezzanine finance)+(weight of debt*cost of debt)

weight of equity=equity finance/total finance

cost of equity=15%

weight of mezzanine finance=mezzanine finance/total finance

cost of mezzanine finance=9.5%

weight of debt of finance=debt finance/total finance

total finance=$5m+$2m+$1m

total finance=$8m

WACC=($5/$8*15%)+($2/$8*9.5%)+($1/$8*7%)

WACC=12.63%

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