Question

Seven different financing plans with their D-E mixes and costs of debt and equity capital for a new innovations project are summarized below. Use the data to determine what mix of debt and equity capital will result in the lowest WACC. Equity Capital Percentage Rate,% Plan 1 2 3 4 5 6 7 Debt Capital Percentage 100 70 65 50 35 20 Rate, % 17.3 13.4 11.2. 112 9.5 7.4 30 35 50 65 80 100 7.8 7.8 7.9 9.8 12.5 125 D-E mix of % has the lowest WACC value.

Answer 1

solutions WACC = (weight of Debt x cost of Debt] [weight of equity & cost of equity] For plan 1 = [1x17:36]+[0x0 = 17.3% For plan 2 & (0.7 x 13:43] + [0.3x7.87] = 9.38% 2.34%. = 11-72% for plan 3 : 10.65* 11.2%.]+[0:35 x 7-8%) = 7.28%. + 2.73%. = 10.01% for plan 4 e 105 x 11.2%)+(0.5x7.92) = 5.6%+ 3.951.-9.55% for plan 5- 6-35 * 9.5%) + 1065x9082] = 3.325246-37%, = 9.695% for plan 6 - 0.974 + 0-8X12:53] =1.48%+ 106 = 14.487 For plan 7 - 6x0%) + (1x 12.5%) = 12.5% So, plan is has the lowest WACC value. Hence D-E mix of 50% – 50% has the lowest WACC Value