CFA Level I · CFA Level I Exam · Capital Structure
A company has a target capital structure of 40% debt and 60% equity. The after-tax cost of debt is 4.5% and the cost of equity is 11.0%. The company's weighted average cost of capital (WACC) is closest to:
WACC is the weighted average of component costs at target weights: 0.40 × 4.5% plus 0.60 × 11.0% equals 8.4%. The after-tax cost of debt is already given, so no further tax adjustment is needed.
- A6.9%
- B8.4%Correct
- C9.5%
Explanation
WACC = 0.40 × 4.5% + 0.60 × 11.0% = 1.8% + 6.6% = 8.4%. Check: 8.4% lies between the two component costs, nearer the equity cost because equity has the larger weight. Using 60% debt and 40% equity would give 7.1%, and using the pre-tax cost of debt would raise the answer.
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