Cost of Capital

A company needs to determine its WACC with the following capital structure:

• Equity: $500,000, cost of equity is 10%
• Debt: $300,000, cost of debt is 6%, tax rate is 35%

Requirements:

1. Calculate the proportion of equity and debt.
2. Determine the after-tax cost of debt.
3. Compute the WACC.
4. Evaluate the impact of an increase in debt by $100,000 on WACC.