WACC=weight x after tax cost of capital of each capital componenthere debt to equity ratio is 50%. So both debt and equity are 50% each.
applying this to the formula:WACC for debt= .50x.07= 0.035WACC for equity= .50x.13= 0.065Total WACC= 0.035+0.065= 0.10 or 10%#
I think the correct answer is 11%. The question states Debt to Equity ratio as 0.5. That is D divided by E=0.5 which obviously means E has a greater value than D. Let's put 1 for D and 2 for E. So 1 divided by 2 = 0.5Total capital = debt+equity, which is 3 as per our assumptionnow allocate the weight to each capital componentdebt=1/3= 33.33%equity 2/3 = 66.67%
Wacc for debt = 33.33%x 7%= 2.33%
wacc for equity = 66.67% x 13%= 8.67%
total wacc= 2.33%+8.67%= 11%
I think this make sense. Debt to equity ratio of 0.5 doesn't mean both are equally distributed. The ratio should be 1 in order for both of them to have equal representation in the capital structure.
sorry for the wrong answer and explanation initially.
Institute of Management Accountants
10 Paragon Drive, Suite 1
Montvale, New Jersey 07645-1760 USA
(800) 638-4427 or +1 (201) 573-9000
CMA Certification CSCA Credential Membership Education Center Career Resources Research & Publications Events