The formula is as follows: W A C C = Ke * We + Kd * Wd
Fantastic news! We've Found the answer you've been seeking!
Question:
The formula is as follows: W A C C = Ke * We + Kd * Wd * ( 1 - T ).Where, Ke=Cost of Equity; We = Weight of Equity; Kd = Cost of Debt; Wd = Weight of Debt; and T = Tax Rate (Corporate Finance Institute, 2016). Cost of Equity is calculated firt then the Cost of Debt and Preferred Stock.In the given question:
Weights of 40% debt and 60% common equity (no preferred equity)
A 35% tax rate
Cost of debt is 8%
Beta of the company is 1.5
Risk-free rate is 2%
Return on the market is 11%
Ke = Rf + ( Rm - Rf) * B.Where, Rf = Risk Free Rate; Rm = Return of Market; B = Beta
API's Cost of Equity: Ke = 2 % + ( 11 % - 2 % ) * 1.5 =15.5 %
Weighted Average cost of capital = 15.5 % * 60 % + 8 % * 40 % * ( 1 - 35 % ) = 11.38 %
is the project feasible?
Posted Date: