Question

Calculate the weighted-average cost of capital for the following debt and equity structures:

$12,000,000 unsecured bonds paying 7.5%.

$15,000,000 common stock paying 2% premium over government bonds, which pay 2%.

32% tax rate

This is an excel assignment I need help with the formulas

Answer 1

Calculation of weighted average cost of capital:

Particulars	Value (in $)
A. Value of unsecured bonds	12,000,000
B. Value of common stock	15,000,000
C. Total market value	27,000,000
D. % Cost of Debt	0.075
E. % Cost of equity	0.04
F. Tax rate	0.32
WACC = ((A/C*D)+(B/C*E))*(1-0.32)	3.78%

WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight, and then adding the products together to determine the value and multiply it by 1-tax rate.

WACC = (E/(D+E)*Cost of Equity + D/(D+E) * Cost of Debt)*(1-tax rate), where E is the market value of equity, D is the market value of Debt.