Question

The company cost of capital for a firm with a 60/40 debt/equity split, 4.5% cost of debt, Beta of 1.3 (use 1.8 for rfr and 6 for mrp), and a 28% tax rate would be:

Answer 1

Weight of Debt = 0.60
Weight of Equity = 0.40
Cost of Debt = 4.50%

Cost of Equity = Risk-free Rate + Beta * Market Risk Premium
Cost of Equity = 1.80% + 1.30 * 6.00%
Cost of Equity = 9.60%

WACC = Weight of Debt * Cost of Debt * (1 - Tax Rate) + Weight of Equity * Cost of Equity
WACC = 0.60 * 4.50% * (1 - 0.28) + 0.40 * 9.60%
WACC = 1.94% + 3.84%
WACC = 5.78%

So, the cost of capital for the firm is 5.78%