Final answer:
To calculate the weighted average cost of capital for Paystack Inc., the after-tax cost of debt (4.345%) is multiplied by its weight in the capital structure (28%), and the cost of equity (12%) is multiplied by its weight in the capital structure (72%). The weighted costs are then added to get a WACC of approximately 9.86%.
Step-by-step explanation:
To calculate Paystack Inc.'s weighted average cost of capital (WACC), we must consider both the cost of debt and the cost of equity, weighted by their respective percentages in the capital structure.
The cost of debt is the expected return on the firm's debt, which is 5.5% (pre-tax). However, debt interest is tax-deductible, so the after-tax cost of debt will be lower. To find the after-tax cost of debt, we multiply the pre-tax cost by (1 - tax rate), which is (1 - 0.21) in this case.
After-tax cost of debt calculation:
5.5% * (1 - 0.21) = 4.345%
Now, we multiply the after-tax cost of debt by the weight of debt in the capital structure, which is 28%:
4.345% * 28% = 1.2166%
The cost of equity is given as the expected return on the firm's equity, which is 12%. We then multiply this by the weight of equity in the capital structure, which is 72%:
12% * 72% = 8.64%
To find the WACC, we simply add these weighted costs together:
WACC = Cost of debt (after-tax) * weight of debt + Cost of equity * weight of equity
WACC = 1.2166% + 8.64%
WACC = 9.8566%
Therefore, Paystack Inc.'s weighted average cost of capital (WACC) is approximately 9.86%.