Question

WACKO Ltd. has $30 million in debt, equity of $55 million, an after-tax cost of debt of 6 percent, a cost of equity of 9 percent, and a tax rate of 25 percent. The firm's weighted average cost of capital (WACC) is ___%.

Answer 1

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.