The capital structure for a particular project consists of $500,000 of retained earnings, a $2.5 million bank loan with a net after-tax cost of capital of 5.5%, $2.5 million of common shares with a cost of capital of 8.2%.What is the weighted average cost of capital (WACC) for the project?

Question

Quizplus · Accepted Answer

The WACC is calculated by weighting each component's cost by its proportion in the total capital. The total capital is $5.5 million. The weights are: retained earnings (9.09%), bank loan (45.45%), and common shares (45.45%). The WACC is (0.0909 * 0) + (0.4545 * 5.5%) + (0.4545 * 8.2%) = 7.0%.

The Capital Structure for a Particular Project Consists of $500,000