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This is what you know for calculating the weighted average cost of capital (WACC): Has a model capital structure of 65% stock (S) and 35% debt (B)
This is what you know for calculating the weighted average cost of capital (WACC):
- Has a model capital structure of 65% stock (S) and 35% debt (B).
- After-tax cost of debt is 6.78% (RB).
- Cost of equity is 13.13% (RS).
Calculate the WACC using this formula:
WACC = [S ÷ (S + B)] × RS + [B ÷ (S + B)] × RB
Expert Solution
Computation of the WACC:-
WACC = [S ÷ (S + B)] × RS + [B ÷ (S + B)] × RB
= (65% / (65% + 35%)) * 13.13% + (35% / (65% + 35%)) * 6.78%
= (65% * 13.13%) + (35% * 6.78%)
= 8.53% + 2.37%
= 10.91%
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