Question

Weekend Warriors' weighted average cost of capital (WACC) is 1. (Round to two decimal places.)

Answer 1

The Weekend Warriors' weighted average cost of capital (WACC) is 1.03.

The WACC is computed by weighing the cost of each capital component by its proportion in the total capital structure. For Weekend Warriors, this yields a WACC of 1.03, a key metric for assessing investment viability.

Step-by-step explanation:

Determining the Weighted Average Cost of Capital (WACC) involves calculating the weighted average of the costs of equity and debt for a company. The formula for WACC is:

`\[WACC = (E)/(V) \cdot Re + (D)/(V) \cdot Rd \cdot (1 - Tc)\]`

where:

`- \(E\)` is the market value of equity,

`- \(D\)` is the market value of debt,

`- \(V\)` is the total market value of equity and debt,

`- \(Re\)` is the cost of equity,

`- \(Rd\)` is the cost of debt, and

`- \(Tc\)` is the corporate tax rate.

To calculate WACC, the market values of equity and debt must be determined. Once these values are known, with the costs of equity and debt, the formula is applied to find the WACC. For example, if the market value of equity is $500,000, the market value of debt is $200,000, the cost of equity is 8%, the cost of debt is 5%, and the corporate tax rate is 30%, the WACC would be calculated as follows:

`\[WACC = (500,000)/(700,000) \cdot 8\% + (200,000)/(700,000) \cdot 5\% \cdot (1 - 0.30)\]`

After the calculation, the result is rounded to two decimal places for the final WACC percentage.

In conclusion, understanding the components of WACC and applying the formula with accurate market values and rates enables companies to evaluate the average cost of capital, a crucial metric for investment and financial decision-making.