Question

Walmart has a before-tax cost of debt of 3.97% and the firm’s cost of equity is 7.83%. Walmart’s capital structure is approximately 20% debt and 80% equity. Given a tax rate of 35%, what is Walmart’s weighted average cost of capital (WACC)?

Answer 1

Information provided:

Target weight of debt= 20%

Target weight of equity= 80%

Before tax cost of debt= 3.97%

Cost of equity= 7.83%

Tax rate= 35%

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= 0.20*3.97%*(1- 0.35) + 0.80*7.83%

            = 0.5161 + 6.2640

            = 6.7801% 6.78%.

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