NuPress Valet has a proposed investment with an initial cost of $62 million and cash flows of $12.5 million for 5 years. Debt represents 44 percent of the capital structure. The cost of equity is 13.7 percent, the pretax cost of debt is 8.5 percent, and the tax rate is 34 percent. What is the company’s WACC?

WACC= 10.14%

Explanation:

Weighted average cost of capital is the average cost of all of the long-term types of finance used by a company weighted according to the that amount of finance used in relation to the total pool of fund.

WACC = (Wd×Kd) + (We×Ke)

After-tax cost of debt = Before tax cost of debt× (1-tax rate)

Kd-After-tax cost of debt  

Ke-Cost of equity  

Wd-Weight f debt  

We-Weight of equity  

After tax cost of debt = (1-T)× Before-tax yield on debt

                                = (1-0.34)× 8.5%

                               =5.61%

Cost of equity = 13.7%

WACC = (Wd×Kd) + (We×Ke)

We= 100-44=56%, Wd= 44%

WACC= (5.61%× 44%) + (13.7%× 56%)

        = 10.14%

WACC= 10.14%

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