Reference no: EM131968853

The formula is as follows: W A C C = Ke * We + Kd * Wd * ( 1 - T ). Where, Ke = Cost of Equity; We = Weight of Equity; Kd = Cost of Debt; Wd = Weight of Debt; and T = Tax Rate (Corporate Finance Institute, 2016). Cost of Equity is calculated firt then the Cost of Debt and Preferred Stock. In the given question:

• Weights of 40% debt and 60% common equity (no preferred equity)
• A 35% tax rate
• Cost of debt is 8%
• Beta of the company is 1.5
• Risk-free rate is 2%
• Return on the market is 11%

Ke = Rf + ( Rm - Rf ) * B. Where, Rf = Risk Free Rate; Rm = Return of Market; B = Beta

API's Cost of Equity: Ke = 2 % + ( 11 % - 2 % ) * 1.5 = 15.5 %

Weighted Average cost of capital = 15.5 % * 60 % + 8 % * 40 % * ( 1 - 35 % ) = 11.38 %