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So i have this question:

Assume the following data for U&P Company: Debt (D) = $100 million; Equity (E) =$300 million; rD = 6%; rE = 12%; and TC = 30%. Calculate the after-tax weighted average cost of capital (WACC):

I know that the formula is indeed

After tax WACC=(1-TC)rD(D/V) + rE(E/V).

If i correctly replace all the numbers i get that the after tax wacc is 6%. For example, in order to get D/V i do 100/130 since V=E+D=130.

However on the answer sheet it states that :

After tax WACC= (1/4)(1 - 0.3)(6) + (3/4)(12) = 10.05%.

I do not understand this answer; where is the (1/4) and the (3/4) coming from ? Shouldn't D/V=100/130 and E/V=30/130?

Thanks for the help!

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$V=E+D=300+100=400$

So

$\frac{E}{V}=\frac{3}{4}$ and

$\frac{D}{V}=\frac{1}{4}$

You probably overlooked one zero and thought equity was 30, but in your question you yourself state that $E=300$.

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  • $\begingroup$ What a dumb mistake ! Thanks anyways $\endgroup$
    – Sara Salvante
    May 31, 2019 at 12:46
  • $\begingroup$ you're welcome! $\endgroup$
    – user18214
    May 31, 2019 at 12:48

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