Question

.

Umpqua Energy Holdings is financed forty percent with debt and sixty percent with equity. Umpqua’s

expected return on equity is 11 percent and its expected return on debt is 5 percent. Umpqua has a

corporate tax rate of 35 percent.

Calculate Umpqua’s weighted average cost of capital.

Answer 1

Information provided:

Expected return on equity= 11%

Expected return on debt= 5%

Tax rate= 35%

Weight of debt in the capital structure= 40%

Weight of equity in the capital structure= 60%

WACC is calculated by using the formula below:

WACC= wd*kd(1-t)+we*ke

where:

Wd=percentage of debt in the capital structure

We=percentage of equity in the capital structure

Kd=cost of debt

Ke=cost of equity

t= tax rate

WACC= 0.40*5%*(1 – 0.35) + 0.60*11%

            = 1.30% + 6.60%

            = 7.90%.

Therefore, the Umpqua's WACC is 7.90%.

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