What is the weighted average cost of capital for a corporation that finances an expansion project using 35% retained earnings and the rest as debt capital

Question

Nathaniel Hogan

Business

23 December, 06:16

What is the weighted average cost of capital for a corporation that finances an expansion project using 35% retained earnings and the rest as debt capital

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Answers (1)

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Dearest · Answer 1

11.75%

Explanation:

In order to calculate the weighted average cost of capital (wacc), we can use the following formula:

wacc = (weight of debt x cost of debt after tax) + (weight of equity x cost of equity)

In this question, since the information about cost of debt and cost of equity are missing, let us assume the cost of debt = 10%, and cost of equity = 15%. The calculated wacc will be equal to:

wacc = [ (1-0.35) x 0.1 ] + [ 0.35 x 0.15 ]

= 11.75%