Question

Georgia Movie Company has a capital structure with 50.00% debt and 50.00% equity. The cost of debt for the firm is 9.00%, while the cost of equity is 15.00%. The tax rate facing the firm is 36.00%. The firm is considering opening a new theater chain in a local college town. The project is expected to cost $12.00 million to initiate in year 0. Georgia Movie expects cash flows in the first year to be $3.10 million, and it also expects cash flows from the movie operation to increase by 4.00% each year going forward. The company wants to examine the project over a 13.00-year period. What is the WACC for this project

Answer 1

Answer:

10.38%

Explanation:

The computation of the WACC is given below:

WACC  = Weight of debt × After tax Cost of debt + Weight of Equity × Cost of Equity

Here After tax cost of debt is

= Cost of debt × (1 - tax rate)

= 9% ×  (1 - 36%)

= 5.76%

Now

WACC = 50% × 5.76% + 50% × 15%

= 10.38%