What is Weighted Average Cost of Capital (WACC)?

Charlotte's Crochet Shoppe has 14,300 shares of common stock outstanding at a price per share of $75 and a rate of return of 11.61%. The company also has 280 bonds outstanding, with a par value of $2000 per bond. The pre-tax cost of debt is 6.13% and the bonds sell for 97.2% of the par.

What is the weighted average cost of capital (WACC), if the tax rate is 40%?

Expert Solution

Concept:

Weighted Average Cost of Capital (WACC): It is also known as the overall cost of capital of having capitals from the different sources. WACC of a company depends on the capital structure of a company. It weights the cost of capital of a particular source of capital (for ex: debt, equity ) with its proportion to the total capital.

WACC is the weighted average after tax costs of the individual components of firm's capital structure. That is, the after tax cost of each debt and equity is calculated separately and added together to a single overall cost of capital.

Following image shows the step-by-step approach to calculate Weighted Average Cost of Capital (WACC):

The weighted average cost of capital = 8.91%

SANJEEV REVADIGAR answered 3 years ago

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