Question

If a company has 30% debt and 70% equity, the interest rate is 10%, the tax rate is 40% and the cost of equity is 12%, what is the WACC?

Answer 1

	W A C C   =   (cost of equity * weight of equity) + (after tax cost of debt * weighted of debt)
		(0.12 * 0.70) + (0.06 * 0.30)
		0.084   +   0.018
		0.102
		or 10.2 %
	*After tax cost of debt = Before tax cost of debt * (1 - Tax rate)
		0.10 * (1 - 0.40)
		0.10 * 0.60
		0.06 or 6%
	*In the absence of information we assumed that the net proceeds is 100, so the before tax cost of debt will be as follows:
	Before tax cost of debt = Interest rate / Net proceeds * 100
		0.10 / 100 * 100
		0.10   or 10%