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Does anyone understand WACC?? I'm so lost! (Finance homework help!)

Discussion in 'Random Ramblings' started by shelleyd2008, Oct 16, 2011.

  1. shelleyd2008

    shelleyd2008 the bird is the word

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    Sep 14, 2008
    Adair Co., KY
    First off, let me say that I am not looking for answers to my homework. I can find 10 sites on the internet that give me the answers I need for this problem, but I can't find anything telling me how to do it. Sure, there are lots that give you descriptions how to calculate, but either I'm not understanding what I need or I don't have the information I need to use (for what the site says). I understand what WACC (weighted average cost of capital) is, I just don't understand how to calculate it!

    The question I need to answer gives values from the balance sheet for Assets, Debt, and Equity. It wants me to find the cost of capital (WACC) given the Debt/Assets %, the After-tax Cost of Debt %, and the Cost of Equity %.

    I have the WACC formula [(E/V) * Re + (D/V) * Rd(1-Tc)], and I believe the After-tax Cost of Debt is the <Rd(1-Tc)> part of it?

    What is the Debt/Asset % used for? There are values of 0%, 10%, 20%,...,60%


    Thank you in advance, I hope someone can help!
     
  2. shelleyd2008

    shelleyd2008 the bird is the word

    23,384
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    Sep 14, 2008
    Adair Co., KY
    My instructor gave the following 'hint':
    Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital
    0% 8% 12% ?

    The cost of capital (k) is a weighted average:
    k = (weight)(cost of debt) + weight(cost of equity)

    Debt/ Weight x + Weight x = Cost of
    Assets Cost Cost Capital
    of Debt of Equity
    0% (.0)(.08) + (1.0)(.12) = .120

    How do I find the weight? I assume it has something to do with the percentages of Debt/Assets (0%, 10%, 20%,..., 60%), but I don't know where that fits [​IMG]
     
    Last edited: Oct 16, 2011
  3. justbugged

    justbugged Head of the Night Crew for WA State

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    Jan 27, 2009
    Enumclaw
    Wouldn't the weight of the debt, be the cost of the interest being charge on the loan? Or the interest rate it self?
     
    Last edited: Oct 17, 2011

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