Given the following information what is the firms weighted a

Given the following information, what is the firm\'s weighted average cost of capital?

Market value of equity = $30 million

Market value of debt = $20 million

Cost of equity = 15%

Cost of debt = 9%

Equity beta = 1.4

Tax rate = 35%

Please clear all the process please.

Solution

WACC is weighted average cost of capital. It is mathematically represented as:

WACC = Cost of debt * Weight of debt * (1 - Tax rate) + Cost of Equity * Weight of equity

Tax deductibility of interest expense is signified by the term \'1 - tax rate\' in above mathematical relationship.

Total market value (MV) of capital = 30 mil + 20 mil = 50 mil

Weight of debt = MV of Debt / Total MV of capital = 20/50 = 40%

Weight of equity = MV of Equity/Total MV of capital = 30/50 = 60%

WACC = 40% * 9% * (1 - 35%) + 60% * 15% = 2.34% + 9% = 11.34%