A venture has raised $4,000 of debt and $6,000 of equity to finance its firm. Its cost of borrowing is 6%, its tax rate is 40%, and its cost of equity capital is 8%. What is the venture's weighted average cost of capital?

WACC = 6.24%≈ 6.2%

Explanation:

Weighted average cost of capital (WACC) = { (S/T) * r1} + { (D/T) * r2) * (1-R) }

Let us define the terms

Stockholder Equity (S) = $6,000

Total value of business = S+D = 4,000+6,000 = 10,000

Cost of equity (r1) = 8%

Debt (D) = $4,000

Cost of debt) r2) = 6%

Tax rate (R) = 40%

Therefore

WACC = { (6,000/10,000) * 0.08} + { (4,000/10,000) * 0.06 * (1-0.40) }

WACC = 0.048 + (0.024*0.6) = 0.048+0.0144

WACC = 0.0624

WACC = 6.24%