Question

Gnomes r us is considering a new project. the company has a debt–equity ratio of .78. the company's cost of equity is 14.6 percent, and the aftertax cost of debt is 7.9 percent. the firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +2 percent. what is the company's wacc?

Answer 1

To look for the company’s WACC for the level of danger in the project. A debt-equity ratio of 0.78 suggests a weight of debt of 0.78/1.78 and a weight of equity of 1/1.80, so the company’s WACC is:

WACC = (0.78/1.78) (0.0780) + (1/1.78) (0.1460)

= 0.03417978 + 0.08202247

WACC = 0.1162 or 11.62%