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CapCo has a capital structure that is composed of $10 million of debt and $30 million of common equity. If CapCo is in the 30% marginal tax rate, what is its weighted average cost of capital if the yield to investors on CapCo debt is 6% and the cost of CapCo common equity is 14%

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Answer: 11.55%

Explanation:

The Weighted Average Cost of Capital is a measure of how much on average, it costs the company to be financed by Equity (Common and Preferential) and debt by proportionately weighing each class.

The formula is;

WACC = (Cost of Equity * %Equity) + (%Debt * Debt interest (1-Tax Rate)) + (Cost of Preferred Stock * %Preferred Stock)

$10 million is debt and $30 million is common Equity which means that total Capital is $40 million.

Equity percentage is,

= 30/40 * 100

= 75% of capital

Debt is therefore 25%

WACC = (14% * 75%) + ( 25% * 6%(1 - 30%))

= 10.5% + 1.05%

= 11.55%

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