Question

What is the WACC (weighted cost of capital) for a company if it borrows from two sources: bank loan of 25 million at 6% per compounded monthly, and retained earning of 10 million with earnings per share of 35 cents and price per share 14.00 dollars. Income tax rate is 35%.

done with the equatuation by hand, not by excel please

Answer 1

eighted Average Cost of Capital (WACC): 3.500%

Total Debt (D)  25 MILLION

Total Equity (E) 10 MILLION

Cost of Debt (Rd) 6%

Cost of Equity (Re)  2.5%

Corporate Tax Rate (Tc) 35 %

=.35/14*100=2.5%

WACC = (E / V) × Re + (D / V) × Rd × (1 − Tc)

Where:

WACC is the weighted average cost of capital,

Re is the cost of equity,

Rd is the cost of debt,

E is the market value of the company's equity,

D is the market value of the company's debt,

V = E + D is the total market value of the company's financing (equity and debt),

E/V is the percentage of equity financing,

D/V is the percentage of debt financing,

Tc is the corporate tax rate.