Question

1. Calculate the WACC for the following company:

COMPANY A

Cost of Debt – 8%

Cost of Equity – 13%

Tax Rate – 28%

Market Value of Debt – $25M

Market Value of Equity – $50M

Answer 1

Answer :

Company A

WACC = E / V * Re + D / V * Rd * ( 1 - Tc )

Where,

Re = cost of equity = 13%

Rd = cost of debt = 8%

E = market value of the firm's equity = $ 50,000,000

D = market value of the firm's debt = $ 25,000,000

V = E + D = 75,000,000

E / V = percentage of financing that is equity = 50,000,000 / 75,000,000 = 66.67%

D / V = percentage of financing that is debt = 25,000,000 / 75,000,000 = 33.33%

Tc = corporate tax rate = 28%

So, WACC = 66.67% * 13% + 33.33% * 8% * ( 1 - 0.28 )

= 0.086671 + 0.01919808

= 0.10586908

WACC = 10.6% (Approx.)