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A company has a weighted cost of capital of 11
A company has a weighted cost of capital of 11.5%, the cost of equity is 16% and the cost of debt is 8.5%. The tax rate is 35%. What are the percentages of equity and debt in the capital structure of the company?
Erkheart Data Systems is considering a project that has the following cash data flow and WACC data. What is the project's MIRR? WACC: 10%.
Year: 0, 1, 2, 3
Cash Flow: -$1000, $550, $450, $460
Expert Solution
Computation of the percentages of equity and debt in the capital structure of the company:-
Weight of debt = Wd
Weight of equity = 1 - Wd
WACC = (Weight of debt * Cost of debt * (1 - Tax rate)) + (Weight of equity * Cost of equity)
11.5% = (Wd * 8.5% * (1 - 35%)) + ((1 - Wd) * 16%)
11.5% = (Wd * 5.525%) + 16% - (16% * Wd)
10.475% * Wd = 16% - 11.5%
Wd = 4.50% / 10.475%
= 42.96%
Weight of debt = Wd = 42.96%
Weight of equity = 1 - Wd
= 1 - 42.96%
= 57.04%
Project's MIRR = 17.46%
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