A venture has raised $4,000 of debt and $6,000 of equity to finance its firm. Its cost of borrowing is 6%, its tax rate is 40%, and its cost of equity capital is 8%. What is the venture's weighted average cost of capital?

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated as: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)), where E is equity, V is total value (equity + debt), Re is cost of equity, D is debt, Rd is cost of debt, and Tc is tax rate. Plugging in the values: WACC = ($6,000/$10,000 * 8%) + ($4,000/$10,000 * 6% * (1-0.40)) = 4.8% + 1.44% = 6.24%, which rounds to 6.2%.

A Venture Has Raised $4,000 of Debt and $6,000 of Equity