Question

Calculate a firm's WACC given that the total value of the firm is $2 million, $600,000 of which is debt, the pre-tax cost of debt is 10%, and the cost of equity is 15%. The firm pays no taxes.

Answer 1

Answer:

the weightage average cost of capital of the firm is 13.50%

Explanation:

The computation of the weighted average cost of capital is shown below;

WACC = Cost of debt × weightage of debt + cost of equity × weightage of equity

= 10% × ($600,000 ÷ $2,000,000) + 15% × ($1,400,000 ÷ $2,000,00)

= 3% + 10.5%

= 13.5%

hence, the weightage average cost of capital of the firm is 13.50%