Discounted cash flow / ORIGINAL SCENARIO

Cost of capital

Equity weight 70%, debt 30%, cost of equity 12%, pre-tax debt cost 6%, tax 25%. Calculate WACC.

Fixed market-value weights; interest deduction usable; no preferred stock. Enter WACC as decimal, not percentage points.

Try it before the answer →

Worked answer

wacc: 0.7 × 0.12 + 0.3 × 0.06 × (1 − 0.25) = 0.0975

Use market-value capital weights.

Tax-effect only cost of debt.

Technical follow-ups

Why might increasing debt eventually raise WACC rather than always reduce it?

Would you use the same WACC for a safe contracted asset and a speculative expansion? Explain the cash-flow risk you are pricing.

Follow-up answer guide

Higher leverage can increase default risk, borrowing costs and required equity returns, reduce tax shield usability, and change weights. A fixed-cost-of-capital thought experiment is not a universal optimization.

A fresh retry

Market-value capital weights are 60% equity and 40% debt. Cost of equity is 14%, pre-tax cost of debt is 7%, and tax is 30%. Calculate WACC.

Fixed market-value weights; interest deduction usable; no preferred stock. Enter WACC as decimal, not percentage points.

Inspect replacement inputs

e: 0.6
d: 0.4
ke: 0.14
kd: 0.07
tax: 0.3

Check the retry bridge

wacc: 0.6 × 0.14 + 0.4 × 0.07 × (1 − 0.3) = 0.1036

Original fictional example. Not a report of a specific firm’s interview. Explanations need qualified human review.