Homework Answers
WACC= We*Re + Wd*Rd*(1-T)
Where,
We= Weight of equity = Equity/Total capital fund
Re= Cost of equity (given as 10%)
Wd= Weight of debt = Debt/Total capital fund
Rd= Cost of debt (given as 5%) and
T= Tax rate (given as 30%)
Also given, Equity= $200,000 and Debt= $400,000.
Therefore, total capital= $200,000 + $400,000 = $600,000
We= 200,000/600,000 = 0.3333 and Wd = 400,000/600,000 = 0.6667
Plugging these values,
WACC= 0.3333*10% + 0.6667*5%*(1-30%)
=0.0333333 + 0.023333 = 0.056667 Or, Rounded to 5.67%
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