Question

Determine the after-tax factor to use in the WACC formula. Show all work

1.

The final inputs needed for the WACC formula is the weighted percentages of equity and debt.

Using the values above, calculate both percentages here.

Total capitalization of company:

Weighted equity percentage:

Weighted debt percentage:

2. Now that you have gathered all of the inputs necessary for the WACC formula, calculate the WACC percentage. Show your work.

3. What does the weighted average cost of capital percentage mean to the owners of BHT?

Answer 1

WACC stands for weighted average cost of capital . It is a total cost of capital of a firm calculated on the basis of proportionaly weightage.

The after tax factors used in the WACC formula are Take the cost of debt or debentures net of tax. To determine the cost of debt we can use the rate at which company pay interest And as we can take a deduction of interest expenses while paying tax so there is a tax saving on it so we can deduct the amount of tax on it.

Example A firm has equity of 60 lakh and debt of 30 lakh

EBIT of 9 lakh

50% of this investment is provided by the debt holders

and cost of debt before tax is 10%

and the other 50% is provided by equity holders

and the cost of equity is 15%

And tax rate is 30%

then find ?

Solution:-

Particular	Amount	Weight	Cost Before tax	Cost After Tax	W*C
Equity	60	0.666667	15%	15%	10.00%
Debt	30	0.333333	10%	7%	2.33%
				WACC	12.33%

(a) Total capitalisation of the company is = EBIT/Ko = 900000/12.33% = $7297297.49$

Weighted Equity Percentage = 10%

Weighted Debt Percentage = 2.33%

(c) The Weighted average mean to the owner of the company is that the total average rate of return of the company over its all invested capital , assets , liabilities etc....