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

WACC 10.01825%

Step-by-step 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((E)/(E+D)) + K_d(1-t)((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%