Xtra has capital of £2m, three- quarters from shareholders who require a rate of return of 10 per cent and one- quarter from lenders, who require an 8 per cent return. What is the WACC?

Question

Quizplus · Accepted Answer

WACC = (w1 x r1) + (w2 x r2)
where, w1 = proportion of equity, r1 = cost of equity, w2 = proportion of debt, r2 = cost of debt

Given: 
Total Capital = £2m
Proportion of equity = 3/4
Proportion of debt = 1/4
Cost of equity = 10%
Cost of debt = 8%

Calculations:
Equity = £2m x 3/4 = £1.5m
Debt = £2m x 1/4 = £0.5m
WACC = [(1.5m/2m) x 10%] + [(0.5m/2m) x 8%] = 9.5%

Therefore, the best choice is C, as it calculates the correct WACC using the given information.

Xtra Has Capital of £2m, Three- Quarters from Shareholders Who