Homework Answers
Equity Weight: 80%
Debts Weight : 20%
Before tax cost of debts: 5%
Cost of equity : 10%
Tax Rate : 21%
We know that ;
WACC: (Cost of equity * Weight of equity) + [Cost of debt (1-tax rate) * Weight of debts]
WACC: (0.10 * 0.80) + [ 0.05 (1- 0.21) * 0.20]
WACC: 0.08 + 0.0079
WACC: 0.0879 or 8.79%
Weighted average cost of capital (WACC) is 8.79%
(Note: We take cost of debt after giving the tax benefit on interest on debt, while calculating WACC.)
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