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Mike and Marianne pulled their resources together to open a coffee place. They each put $20,000 and also took a bank loan of $20,000. Interest rate the bank charges is 8% and estimated tax rate is 30% for their business. If they both want a 12% return on their investment, what is the weighted average cost of capital

Sagot :

Kolawole845

Answer:

WACC= 9.8%

Explanation:

The weighted Average cost of Capital is the average cost of capital for the different sources of long-term capital available to a firm weighted according to the proportion each source of finance bears to the total capital in the pool.

After-tax cost of debt = (1- tax rate) × before tax cost of debt  

= (1-0.3)× 8% = 5.6%

Total Equity = 20,000× 2= 40,000.

Bank loan = 20,000

Total value fund = 40,000 + 20,000 = 60,000

WACC= 5.5%× (2/6)  + 12%× (4/6) = 9.8%

WACC= 9.8%

     

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