g A company has only two type of capital : debt and equity. It has a target debt-equity ratio of 1.4 . Its cost of equity is 7% , and its cost of debt is 4%. If the tax rate is 26% , what is the company's WACC

WACC = 0.06192 or 6.192%

Explanation:

The WACC or weighted average cost of capital is the cost of a firm's capital structure which can comprise of one or all of the following components namely debt, preferred stock and common stock.

For a company with 2 components of capital structure, the formula for WACC is,

WACC = wD * rD * (1 - tax rate)  +  wE * rE

Where,

Total weight of capital structure = 1 + 4 = 5

Weightage of debt = 1/5

Weightage of equity = 4/5

WACC = 1/5 * 0.04 * (1 - 0.26)  +  4/5 * 0.07

WACC = 0.06192 or 6.192%

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