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?

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Quizplus · Accepted Answer

The venture's weighted average cost of capital (WACC) is calculated by weighting the cost of each type of capital (debt and equity) by its proportion in the total capital and adjusting the cost of debt for taxes. The calculation is as follows:- Total capital = $4,000 (debt) + $6,000 (equity) = $10,000- Proportion of debt = $4,000 / $10,000 = 0.4- Proportion of equity = $6,000 / $10,000 = 0.6- After-tax cost of debt = 6% * (1 - 0.4) = 3.6%- Cost of equity = 8%WACC = (0.4 * 3.6%) + (0.6 * 8%) = 1.44% + 4.8% = 6.24%Rounded to one decimal place, the WACC is approximately 6.2%.

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