Question

The formula for WACC = (weight of equity * cost of equity) + (weight of debt * after tax cost of debt). If a company has two bonds with different after tax cost of debts, how will you calculate the WACC for that company? Explain in 2-3 sentences.

Answer 1

WACC is weighted average cost of capital. In the formula below, we see that average of proportionate weights of bonds, equity along with their respective cost is calculated to get WACC.

The basic principle of WACC must be followed to get WACC i.e. weight of components in capital structure must be multiplied with its cost to company and the products must be added.

In order to calculate WACC with two bonds with different after tax cost of debts, then the below formula will be used:

WACC = { Weight Of Bond₁ * After Tax Cost Of Debt₁ } + { Weight Of Bond₂ * After Tax Cost Of Debt₂}

+ { Weight Of Equity * Cost Of Equity }