The WAAC Formula:

[%Debt X Cost of Debt (1-t)] + [%Equity X Cost of Equity]

1. The required rate of return for a firm's stock (cost of equity) as determined by the CAPM is 10% per year. The yield to maturity on its debt is 5% (cost of debt) and the company's marginal tax rate is 35%. The firm has a market value of $500 million in equity and $500 million in debt. What is the firm's WAAC?

2. When computing a firm's WAAC, why do we use the firm's AFTER TAX cost of debt?

[% Debt Cost of Debt (1-t)] + [\%Equity Cost of Equity] 1. The required rate of return for a firm's stock (cost of equity) as determined by the CAPM is 10% per year. The yield to maturity on its debt is 5% (cost of debt) and the company's marginal tax rate is 35%. The firm has a market value of $500 million in equity and $500 million in debt. What is the firm's WAAC? 2. When computing a firm's WAAC, why do we use the firm's AFTER TAX cost of debt