Question

What is the weighted average cost of capital after taxes for Moss Diet Centers if the target weights are 25% equity and 75% debt, and the costs of equity and after-tax debt are 15% and 12%, respectively

Answer 1

WACC is 12.8%

Step-by-step explanation:

The weighted average cost of capital (WAAC) is the average cost of all the various sources of long-term finance used by a business weighted according to the proportion which each source of finance bears to the the entire pool of fund.

To calculate the weighted average cost of capital, follow the steps below:

Step 1: Calculate cost of individual source of finance(this is already given)

Cost of Equity= 15%

After-tax cost of debt = (1- T) × before-tax cost of debt =12%

Step 2 : calculate the proportion or weight of the individual source of finance . (This already given)

Equity = 25%

Debt= 75%

Step 3; Work out weighted average cost of capital (WACC)

WACC = ( 15%× 25%) + ( 12%× 75%)

= 12.75%

WACC is 12.8%