How do you calculate WACC given an optimal capital structure?
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A company has determined that its optimal capital structure consists of 40 percent debt and 60 percent equity. Given the following information, calculate the firm's weighted average cost of capital.
rd = 6%
Tax rate = 40%
P0 = $25
Growth = 0%
D0 = $2.00
a. 6.0%
b. 6.2%
c. 7.0%
d. 7.2%
e. 8.0%
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The solution shows how to calculate the WACC.
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WACC is the weighted average cost of capital and is calculated as below
WACC = proportion of debt X after tax cost of debt + proportion of equity X cost of equity
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