Final answer:
The Weighted Average Cost of Capital (WACC) for Coffeecarts, given a cost of equity of 15.4%, an after-tax cost of debt of 3.5%, and a 70/30 equity/debt financing mix, is calculated to be 11.83%.
Step-by-step explanation:
The student asks how to calculate the Weighted Average Cost of Capital (WACC) for Coffeecarts, which has a specified cost of equity, after-tax cost of debt, and a particular financing structure. The WACC is a measure that gives us the average rate that a company expects to pay to finance its assets. It reflects the average cost of the company’s sources of financing, which include equity and debt, each weighted proportionally.
To calculate the WACC, we use the formula:
WACC = (E/V) × Re + (D/V) × Rd × (1-Tc)
Where:
• E is the market value of the equity,
• V is the total market value of equity and debt,
• Re is the cost of equity,
• D is the market value of the debt,
• Rd is the cost of debt,
• Tc is the corporate tax rate.
In this scenario, Coffeecarts is financed with 70% equity and 30% debt, with a cost of equity at 15.4% and an after-tax cost of debt at 3.5%. Since the after-tax cost of debt is already given, we do not need to adjust it for taxes in the calculation. Thus, the WACC calculation would be:
WACC = (0.70 × 0.154) + (0.30 × 0.035)
WACC = 0.1078 + 0.0105
WACC = 0.1183 or 11.83%
Therefore, the WACC for Coffeecarts is 11.83%.