Based on the financial model provided in the image, here is the step-by-step solution to find the
Weighted Average Cost of Capital (WACC).
Step 1: Identify the Formula
The formula for WACC is:
$$WACC = (\text{Cost of Equity} \times \% \text{Equity}) + (\text{Cost of Debt} \times \% \text{Debt} \times (1 - \text{Tax Rate}))$$
*Note: We multiply the Cost of Debt by $(1 - \text{Tax Rate})$ because interest payments on debt are tax-deductible.*
Step 2: Extract Values from the Image
Looking at the "Capital and Cost of Capital" section on the left side of the screen:
*
Equity % ($E/V$): $30\%$ (or $0.30$)
*
Cost of Equity ($K_e$): $15.00\%$ (or $0.15$)
*
Debt % ($D/V$): $70\%$ (or $0.70$)
*
Cost of Debt ($K_d$): $7.00\%$ (or $0.07$)
*
Tax Rate: $33.00\%$ (found in the "Taxation & Amortisation" section)
Step 3: Perform the Calculations
Part A: Calculate the Equity Component
$$0.30 \times 15.00\% = 4.50\%$$
Part B: Calculate the Debt Component (After Tax)
First, find the after-tax cost of debt:
$$7.00\% \times (1 - 0.33) = 7.00\% \times 0.67 = 4.69\%$$
Next, multiply by the Debt percentage:
$$0.70 \times 4.69\% = 3.283\%$$
Part C: Add them together
$$WACC = 4.50\% + 3.283\%$$
$$WACC = 7.783\%$$
Rounding to two decimal places, we get
7.78%.
Final Answer:
The Weighted Average Cost of Capital (WACC) is
7.78%.
Parent Tip: Review the logic above to help your child master the concept of business valuation worksheet.
