What is the weighted average cost of capital for a corporation that finances an expansion project using 40% retained earnings and the rest as debt capital? Assume the interest rates are 10% for equity financing and 29% for debt financing.

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Business

Guerrero

20 February, 03:11

What is the weighted average cost of capital for a corporation that finances an expansion project using 40% retained earnings and the rest as debt capital? Assume the interest rates are 10% for equity financing and 29% for debt financing.

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Linda Lucas · Answer 1

21.4%

Explanation:

The formula to calculate the weighted average cost of capital is as follow (In this case the corporate tax is not mentioned so we assume that it's = 0):

wacc = (weight of the firm's debt x cost of debt after-tax) + (weight of the firm's equity x cost of equity)

= (0.6 x 0.29) + (0.4 x 0.1)

= 0.214 = 21.4%