Answer:
8.45%
Step-by-step explanation:
The formula used to calculate WACC is:
WACC = {[total equity/(total debt + equity)] x cost of equity} + {[total debt/(total debt + equity)] x cost of debt x (1 - tax rate)}
first we have to calculate the cost of equity:
cost of equity = risk free rate + (beta x market risk premium) = 4% + (1.2 x 7.5%) = 4% + 9% = 13%
now, WACC:
WACC = {[880/(880+880)] x 13%} + {[880/(880+880)] x 6% x (1 - 35%)} = (0.5 x 13%) + (0.5 x 6% x 0.65) = 6.5% + 1.95% = 8.45%
WACC = weighted average cost of capital is the rate at which the company effectively finances its assets