Calculating the WACC Gnomes R Us is considering a new projec

Solution

WACC = Weight of Debt * Cost of Debt + Weight of Equity * Cost of Equity WACC = 44.44% * 7.8% + 55.56% * 14.5% WACC = 3.47% + 8.06% WACC = 11.53% Weight of Debt = Debt-Equity Ratio / (1 + Debt-Equity Ratio) = .8/ (1+.8) = 44.44% Weight of Equity = 1 / (1 + Debt-Equity Ratio) = 1 / (1 + .8) = 55.56% Company use the WACC because of risky project = 11.53% + 3% = 14.53%