Question

A firm uses INR 50million of debt,INR15million of short-term debt, and INR 90million of common equity to finance its assets. If the before-tax cost of debt is 10%, after-tax cost of short-term debt is 8%, and the cost of common equity is 16%, calculate the weighted average cost of capital for the firm assuming a tax rate of 20%.

Answer 1

- Total value of Debt = $50 milliom

- Total Value of short term Debt = $15 million

- Total Value of Common equity = $90 million

Total Value of capital Structure = $50M + $15M + $90M = $155M

WACC= (Weight of Debt)(before-tax Cost of Debt)(1-Tax Rate) + (Weight of Short-term Debt)(after-tax Cost of Short-term Debt)+ (Weight of Equity)(Cost of Equity)

WACC = (50M/155M)(10%)(1-0.20) + (15M/155M)(8%) + (90M/155M)(16%)

WACC = 2.5806% + 0.7742% + 9.2903%

WACC = 12.65%

So, the weighted average cost of capital is 12.65%