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

    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

    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

    Jan 27, 2009
    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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