Symbol Definition
WACC Weighted Average Cost of Capital
$$k_d$$ cost of debt capital
$$t_c$$ corporate tax rate
$$k_e$$ cost of equity capital
$$D$$ market value of debt
$$E$$ market value of equity
$$V=D+E$$ market value of assets
$\mathrm{WACC} = k_d(1-t_c) \cdot \dfrac{D}{V} + k_e \cdot \dfrac{E}{V}$

# WACC

The cost of debt is 7% and the current outstanding debt is \$1.4 million. The cost of equity is 14% and the D/E ratio is 1. The tax rate for businesses is 30%. What is the weighted average cost of capital?

$k_d = 0.07, t_c=0.3, D=1400000, k_e=0.14$

$$E=D$$ so $$\dfrac{D}{V}=\frac{1}{2}$$ and $$\dfrac{E}{V}=\dfrac{1}{2}$$.

$\mathrm{WACC} = (0.07)(1-0.3) \cdot \frac{1}{2} + (0.14) \cdot \frac{1}{2} = 0.0945$

# WACC

A company has three bonds:

1. Bond maturing in 2016, Market Value = 1.5 bn, Cost of debt = 2.45%

2. Bond maturing in 2019, Market Value = 2.1 bn, Cost of debt = 2.9%

3. Bond maturing in 2025, Market Value = 1 bn, Cost of debt = 3.2%

If corporate tax rate is 0%, what is the WACC?

$V_1=1.5, V_2 = 2.1, V_3 = 1$ $V = V_1+V_2+V_3 = 4.6$ $w_1 = \dfrac{V_1}{V} = \frac{15}{46}, w_2 = \dfrac{V_2}{V} = \frac{21}{46}, w_3 = \dfrac{V_3}{V} = \frac{10}{46}.$ $c_1 = 0.0245, c_2 = 0.029, c_3 = 0.032$ $\mathrm{WACC} = w_1c_1 + w_2c_2 + w_3c_3 = 0.0282$