A company is financing itself with $100 million in debt and $300 million in equity. The...
A company is financing itself with $100 million in debt and $300 million in equity. The cost of debt is 4% while of equity is 12%. If the company’s tax rate is 20%, its weighted average cost of capital is?
Homework Answers
WACC = Weight of debt * Pretax cost of debt * (1 - Tax) + Weight of Equity * Cost of Equity
Weight of debt = Debt/(Debt + Equity) = $100mil/($100 mil + $300 mil) = 25%
Weight of equity = Equity/(Debt + Equity) = $300mil/($100 mil + $300 mil) = 75%
WACC = 25% * 4% * (1 - 20%) + 75% * 12%
WACC = 0.098 = 9.80%
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