r/HomeworkHelp • u/imtheophilus • 1d ago

Others—Pending OP Reply [Finance] WACC Calculations

How does my professor get 7.12% when WACC = (D/V)(Rd)(1-Tax) + (E/V)(Re)?

btw, using the above equation, my answer was 6.54%, hence I selected option C. PLEASE HELP

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u/TheGrimSpecter 🤑 Tutor 1d ago

WACC = (D/V)(Rd)(1-T) + (E/V)(Re). Given: Rd = 5%, Re = 9%, debt-to-equity = 0.75, tax rate = 35%.

D/E = 0.75, so D = 0.75E. V = D + E = 1.75E. D/V = 0.75/1.75 = 3/7, E/V = 1/1.75 = 4/7.

WACC = (3/7)(0.05)(1-0.35) + (4/7)(0.09) = (3/7)(0.05)(0.65) + (4/7)(0.09) = (3/7)(0.0325) + (4/7)(0.09) = 0.013929 + 0.051429 = 0.065357 = 6.54%.

6.54% is correct. 7.12% doesn’t add up—prof might’ve used wrong inputs