Answer:
The firm's weighted average cost of capital (WACC) is 7.94%.
Explanation:
WACC is the weighted average cost of capital which is calculated on the sum of ratio of debt and equity in total funding. It is the average cost of each total capital employed in the business whether from equity or debt.
Total debt and Equity = 30 million + 55 million = 85 million
Weightage of Equity = 55 million / 85 million = 0.6471
Weightage of Debt = 30 million / 85 million = 0.3529
Cost of equity = 9% = 0.09
Cost of debt = 6% after tax = 0.06
Weighted Average Cost of Capital = (Cost of equity x weightage of capital) + ( cost of debt x weightage of debt )
Weighted Average Cost of Capital = ( 0.09 x 0.6471 ) + ( 0.06 x 0.3529 )
Weighted Average Cost of Capital = 0.05824 + 0.02117
Weighted Average Cost of Capital = 0.07941
Weighted Average Cost of Capital = 7.94%
* Ad cost of debt already given in terms of after tax so, there is no need to include the tax factor in WACC formula.
