Answer:
11.46%
Explanation:
WACC is the weighted average cost of capital employed from different sources i.e. common equity, preferred equity and debt
To calculate WACC, the weighted average costs of each kind of capital employed is added so the formula becomes:
WACC =(D x (1 - Tax) x %D) + (P x %P) + (E x %E)
D = cost of debt
P = cost of preferred equity
E = cost of common equity
%D = Debt / total capital
%P = Preferred equity / total capital
%E = Common equity / total capital
<em>Interest expense is tax deductible therefore it is adjusted for tax when calculating WACC</em>
Since there is no preferred equity in the question the formula will become:
WACC =(D x (1 - Tax) x %D) + (E x %E)
<u>Solution:</u>
Debt to equity = 0.62
Debt + Equity = 1.62 ( 0.62 + 1 <em>Since Debt is $0.62 for every $1 of equity</em>)
%D = 0.62/1.62 = 38.27%
%E = 1/1.62 = 61.73%
D = 9.8%
E = 14.8%
Using the above formula, we can calculate WACC
WACC = (9.8% x (1 - 38%) x 38.27%) + (14.8% x 61.73%)
WACC = 0.1146 or 11.46%
<em>*Values rounded to two decimal points*</em>
