Question

A firm has a total value of $548,000 and debt valued at $262,000. What is the weighted average cost of capital if the aftertax cost of debt is 7.2 percent and the cost of equity is 12.6 percent?

Answer 1

Answer:

WACC 10.01825%

Explanation:

before calculate WACC we need to calculate the equity and debt weights

Debt  262,000

Value  548,000

Equity  548,000 - 262,000 = 286,000

Weight of Debt 262,000/548,000 = 0.52189781

Weight of Equity 286,000/548,000 = 0.47810219

Now we can solve the WACC

$WACC = K_e(\frac{E}{E+D}) + K_d(1-t)(\frac{D}{E+D})$

Ke = cost of equity =                     0.126

Equity weight 0.52189781

Kd(1-t) = after-tax cost of debt = 0.072

Debt Weight         0.47810219

$WACC = 0.126(0.521897810218978) + 0.072(0.478102189781022)$

WACC 10.01825%