If cost of equity is 8% and cost of debt after tax is 8% and the debt to equity ratio is 1:1. How do I calculate the WACC? Thank you.
Convert the D/E ratio to the Debt Ratio (D/A). The simplest way is to set Equity to $100. So, since D/E = 1, Debt = $100 and Assets = $100+$100 = $200, and D/A = 100/200 = 0.5.
Do, W(D) = 0.5 and W(E) = 0.5, and you have everything you need for the WAC formula.
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Thank you very much for that. I was struggling with the D/E ratio, so this has cleared this up a lot for me.
The WACC is now 8% which makes a lot more sense.
Thanks.
You’re welcome.