WACC and Corporate Tax for a Firm

International Finance Calculations - Weighted Average Cost

A firm has a corporate tax rate of 35%, a cost of debt of 8.25%, with a 15% cost on its equity capital. There is $15,000,000 in debt and $25,000,000 in equity in its capital structure. What is the weighted average cost of capital of this firm?

Weighted Average Cost= Weight of Debt * Cost of debt + Weight of Equity * Cost of equity
=(15/40) *8.25%*(1-.35) + (25/40)*15%
=0.1138 or 11.38%

Cost of debt has been considered as post tax cost of debt.

The same firm as in question 4 above changes its capital structure to reflect a 50/50 split between debt and equity (that is 50% debt and 50% equity). What will its cost of capital be now?

Weighted Average Cost= Weight of Debt * Cost of debt + Weight of Equity * Cost of equity
=(50%) *8.25%*(1-.35) + (50%)*15%
=0.1018125 or 10.18%

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