Question

Provide a formula for WACC and complete a calculation given a: $50,000 project with $10,000 down...

Provide a formula for WACC and complete a calculation given a:

$50,000 project with $10,000 down payment in cash from capital (retained earnings) and $40,000 from a bank loan.

Assume the firm's retained earnings after tax required rate is 10%, estimate a bank loan rate.

USE EXCEL TO SHOW FORMULAS AND EXPLAIN FINAL ANSWER!

COULD YOU INDICATE WHAT IS MISSING?

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Answer #1

In the above problem, since cost of debt is not provided (missing), an after tax cost of debt equal to the bank loan rate of 5% is considered, Then, WACC (Weighted Average cost of capital) can be calculated thus

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