ABC company has a total asset value of 5000000 of which 4000

ABC company has a total asset value of $5,000,000 of which $4,000,000 comes from debt sources. The cost of debt is 12% and the cost of equity is 30%. The firm pays no taxes. What is WACC?

Solution

“Weighted Average Cost of Capital [WACC] = 15.60%”

Value of Each Capital Components

Value of Debt = $40,00,000

Value of Equity = $10,00,000

Total Value = $50,00,000

Weight of Debt and Equity

Weight of Debt = $40,00,000 / 50,00,000 = 0.80

Weight of Equity = $10,00,000 / 50,00,000 = 0.20

Weighted Average Cost of Capital [WACC]

= [Cost of Debt x Weight of Debt ] + [ Cost of equity x Weight of Equity]

= [12% x 0.80] + [30% x 0.20]

= 9.60% + 6%

= 15.60%