Astra Containers is seeking to borrow $45 million at an interest rate of 6 percent. Astra will raise an additional $30 million through equity investment, returning 10 percent. What is the WACC?Select an answer:10.6 percent6 percent7.6 percent8 percent
Question
Astra Containers is seeking to borrow 30 million through equity investment, returning 10 percent. What is the WACC?Select an answer:10.6 percent6 percent7.6 percent8 percent
Solution
To calculate the Weighted Average Cost of Capital (WACC), we need to take into account the proportion of each source of capital (debt and equity) and its respective cost.
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First, calculate the proportion of debt and equity:
- Debt = 45 million + $30 million) = 0.6 or 60%
- Equity = 45 million + $30 million) = 0.4 or 40%
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Next, multiply the cost of each source of capital by its proportion:
- Weighted cost of debt = 6% * 0.6 = 3.6%
- Weighted cost of equity = 10% * 0.4 = 4%
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Finally, add the weighted costs together to get the WACC:
- WACC = 3.6% + 4% = 7.6%
So, the WACC is 7.6 percent.
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