For Midland Energy Resources Cost of Capital How sensitive i

For Midland Energy Resources Cost of Capital: How sensitive is the corporate weighted average cost of capital to changes in the target debt/equity ratio?

Solution

The weighted average cost of capital is sensitive to target debt/equity ratio. The formula of WACC is, if the there is only debt and equity in the organisation ie

WACC = (Weight of debt*Cost of debt) + (Weight of equity*Cost of debt)

When the ratio of debt/equity changes, sometimes the debt and equity value changes so it will effect the weighted average cost of capital.