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Homework answers / question archive / 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)

Finance

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

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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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