Question

Compute the WACC when

• cost of equity = 0.14
• cost of debt = 0.06
• debt ratio = 0.35
• tax rate = .35

Answer 1

WACC formula = ( Cost of equity *Percentage of equity)+ [Cost of debt *Percentage of debt*(1-tax rate)]

Since the debt ratio is given which is a reflection of total debt in overall capital structure so ,

If debt ratio is .35, that means equity will be rest in the capital structure ,So equity will be = ( 1-.35)= .65

Debt weight will be =.35

Equity weight will be = .65

WACC = ( .14*.65) +[ .06*.35(1-.35)

= .091+ [ .021*.65]

= .091+.01365

= .10465 OR 10.465%

So WACC will be 10.465%