XYZ Inc. has $10 million in excess cash, a market capitalization of $300 million and a market value of debt of $110 million. Its cost of equity is 12% and its cost of debt is 5%. The corporate tax rate is 31%. Calculate the WACC for XYZ Inc. Express your answer in percent and round to two decimals (do not include the %-symbol in your answer).

Solution :We know,

[tex]$\text{WACC}=\text{equity weightage } \times \text{equity cost} + \text{net debt weightage} \times \text{debt cost} \times (1 -\text{tax rate})$[/tex]

Net debt = debt market value – excess cash

= 110 – 10

= 100 million dollar

[tex]$\text{net debt weightage}=\frac{\text{market value of net debt}}{\text{equity market value+ net debt market value}}$[/tex]

[tex]$=\frac{100}{300+100}$[/tex]

= 0.25

[tex]$\text{equity weightage}=\frac{\text{market value of equity}}{\text{equity market value+ net debt market value}}$[/tex]

[tex]$=\frac{300}{300+100}$[/tex]

= 0.75

Therefore, WACC = 0.75 x 12% + 0.25 x 5% x (1 – 31%)

= 0.75 x 12% + 0.25 x 5% x (1 – 0.31)

= 0.75 x 12% + 0.25 x 5% x 0.69

= 9% + 0.862%

= 9.862%