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9 December, 13:11

Assume your company's capital structure is 75% equity and 25% debt. The bank will loan you money at 6% interest, net of tax, and your only shareholder wants to achieve at least a 20% return on her investment. What is your Weighted Average Cost of Capital (WACC) ?

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  1. 9 December, 13:28
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    WACC is 16.5%

    Explanation:

    Given:

    Weight of equity is 75% or 0.75

    Weight of debt is 25% or 0.25

    Total value of firm is 1 (0.75 + 0.25)

    Cost of debt is 6% or 0.06

    Cost of equity is 20% or 0.2

    WACC = (weight of debt * cost of debt) + (weight of equity * cost of equity)

    = (0.25 * 0.06) + (0.75 * 0.2)

    = 0.165 or 16.5%

    Therefore WACC is 16.5%
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