Response:
a.
16%
b.
17.3%
c.
23.25%
d.
16%
Clarification:
WACC represents the average cost of capital for a firm, based on the proportions of debt and equity multiplied by their respective costs.
Having the capital cost, the next step is to compute the equity cost.
Cost of Capital = (Cost of Equity x Proportion of equity) + (Cost of Debt x Proportion of Debt)
a.
No Debt
16% = (Cost of Equity x 1 ) + (8.75% x 0)
16% = Cost of Equity + 0
Cost of Equity = 16%
b.
15% Debt and 85% for Equity (100%-15%)
16% = (Cost of Equity x 85% ) + (8.75% x 15%)
0.16 = (Cost of Equity x 0.85) + 0.013125
0.16 - 0.013125 = Cost of Equity x 0.85
0.146875 = Cost of Equity x 0.85
Cost of Equity = 0.146875 / 0.85 = 0.17279
Cost of Equity = 17.3%
c.
50% Debt and 50% for Equity (100%-50%)
16% = (Cost of Equity x 50% ) + (8.75% x 50%)
0.16 = (Cost of Equity x 0.50) + 0.04375
0.16 - 0.04375 = Cost of Equity x 0.50
0.11625 = Cost of Equity x 0.50
Cost of Equity = 0.11625 / 0.50 = 0.2325
Cost of Equity = 23.25%
d.
WACC in b and c remains at 16%
