The situation
Market values are ₹300 crore equity and ₹200 crore debt. Cost of equity is 14%, pre-tax debt cost is 9%, and the assumed tax rate is 25%.
Your task
What WACC fits the stated target mix?
Reveal step-by-step solution
Set up the problem
Equity weight = 300 ÷ 500 = 60%. Debt weight = 40%. After-tax debt cost = 9% × 75% = 6.75%.
Work through the numbers
WACC = 0.60 × 14% + 0.40 × 6.75% = 11.10%.
Interpret the result
Use 11.10% for comparable operating cash flows under the assumed risk, currency and leverage.
What to remember
Match market-value weights, after-tax debt cost and the risk of the cash flows.