Homework Answers
Calculating Firms Before Tax Cost of Capital
If the company has used different methods of financing, then the cost of capital is calculated by the weighted average cost of capital.
The method for calculating WACC is often expressed in the following formula:
WACC = percentage of financing that is equity * cost of equity + percentage of financing that is debt * cost of Debt
Percentage of financing that is equity = market value of the firm’s equity / total market value of the firm’s financing (equity and debt)
=40000*15/(40000*15+150000)
= .8
Cost Of Equity = Re=Rf+Beta(Rm-Rf)
Rf = Risk Free Return =7%
Beta =1.2
Rm = MArket Return =14%
Re =7+1.2(14-7)
=15.4%
Percentage of financing Debt = market value of the firm’s Debt / total market value of the firm’s financing (equity and debt)
=150000/(40000*15+150000)
=.2
Cost of Debt = 7%
Answer :
WACC =.8*15.4 + .2*7
=13.72%
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