WACC formula
| 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 |
WACC
\[k_d = 0.07, t_c=0.3, D=1400000, k_e=0.14\]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?
\(E=D\) 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
\[V_1=1.5, V_2 = 2.1, V_3 = 1\] \[V = V_1+V_2+V_3 = 4.6\] \[w_1 = \dfrac{V_1}{V} = \frac{15}{46}, w_2 = \dfrac{V_2}{V} = \frac{21}{46}, w_3 = \dfrac{V_3}{V} = \frac{10}{46}.\] \[c_1 = 0.0245, c_2 = 0.029, c_3 = 0.032\] \[\mathrm{WACC} = w_1c_1 + w_2c_2 + w_3c_3 = 0.0282\]A company has three bonds:
Bond maturing in 2016, Market Value = 1.5 bn, Cost of debt = 2.45%
Bond maturing in 2019, Market Value = 2.1 bn, Cost of debt = 2.9%
Bond maturing in 2025, Market Value = 1 bn, Cost of debt = 3.2%
If corporate tax rate is 0%, what is the WACC?