Assume your company's capital structure is 75% equity and 25% debt. The bank will loan you money at 6% interest, net of tax, and your only shareholder wants to achieve at least a 20% return on her investment. What is your Weighted Average Cost of Capital (WACC) ?

Question

Business

Winston Gallagher

15 March, 08:13

Assume your company's capital structure is 75% equity and 25% debt. The bank will loan you money at 6% interest, net of tax, and your only shareholder wants to achieve at least a 20% return on her investment. What is your Weighted Average Cost of Capital (WACC) ?

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Answers (1)

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Jesse Pena · Answer 1

WACC is 16.5%

Explanation:

Given:

Weight of equity is 75% or 0.75

Weight of debt is 25% or 0.25

Total value of firm is 1 (0.75 + 0.25)

Cost of debt is 6% or 0.06

Cost of equity is 20% or 0.2

WACC = (weight of debt * cost of debt) + (weight of equity * cost of equity)

= (0.25 * 0.06) + (0.75 * 0.2)

= 0.165 or 16.5%

Therefore WACC is 16.5%