Question

Georgia Movie Company has a capital structure with 40.00% debt and 60.00% equity. The cost of debt for the firm is 8.00%, while the cost of equity is 14.00%. The tax rate facing the firm is 40.00%. The firm is considering opening a new theater chain in a local college town. The project is expected to cost $12.00 million to initiate in year 0. Georgia Movie expects cash flows in the first year to be $2.60 million, and it also expects cash flows from the movie operation to increase by 4.00% each year going forward. The company wants to examine the project over a 10.00-year period. What is the WACC for this project

Answer 1

10.32%

Step-by-step explanation:

The computation of the weighted average cost of capital is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate)+ (Weightage of common stock) × (cost of common stock)

= (0.40 × 8%) × ( 1 - 40%) + (0.60 × 14%)

= 1.92% + 8.4%

= 10.32%

We simply multiplied the weight with its cost i.e weight of debt with the weightage of debt and weight of equity with the weightage of equity