Answer:
a.
16%
b.
17.3%
c.
23.25%
d.
16%
Explanation:
WACC is the average cost of capital of the firm based on the weightage of the debt and weightage of the equity multiplied to their respective costs.
As have the cost of capital, we need to calculate the cost of equity.
Cost of Capital = (Cost of Equity x Weightage of equity) + (Cost of Debt x Weightage of Debt)
a.
No Debt
16% = (Cost of Equity x 1 ) + (8.75% x 0)
16% = Cost of Equity + 0
Cost of Equity = 16%
b.
15% Debt and Equity is 85% (100%-15%)
16% = (Cost of Equity x 85% ) + (8.75% x 15%)
0.16 = (Cost of Equity x 0.85) + 0.013125
0.16 - 0.013125 = Cost of Equity x 0.85
0.146875 = Cost of Equity x 0.85
Cost of Equity = 0.146875 / 0.85 = 0.17279
Cost of Equity = 17.3%
c.
50% Debt and Equity is 50% (100%-50%)
16% = (Cost of Equity x 50% ) + (8.75% x 50%)
0.16 = (Cost of Equity x 0.50) + 0.04375
0.16 - 0.04375 = Cost of Equity x 0.50
0.11625 = Cost of Equity x 0.50
Cost of Equity = 0.11625 / 0.50 = 0.2325
Cost of Equity = 23.25%
d.
WACC for b and c are 16%
