Weighting Multiple Debt Issues in a WACC Calculation

Summary

The document raises a corporate finance question about how to include a new debt issue in the weighted average cost of capital when a company already has debt and equity. It gives an example with two debt tranches carrying different pre-tax borrowing costs, an equity component with its own cost, and a stated tax rate. The displayed calculation assigns each financing component a weight based on its amount relative to total capital and applies the tax adjustment to debt costs.

The material illustrates the component-by-component weighting approach rather than explaining whether or when debt costs should be combined into a single average. It offers no supporting discussion of market-value versus book-value weights, marginal versus existing financing costs, target capital structure, or tax assumptions. As presented, it is a useful prompt for thinking about WACC inputs, but it is too brief to establish a general answer or show how the calculation should be interpreted for an actual financing decision.

Key ideas

• WACC combines financing costs according to the relative weights of debt and equity.
• Debt costs are adjusted for taxes in the displayed calculation.
• Separate debt issues can have different borrowing costs and weights.
• The example does not explain which capital weights or debt-cost assumptions are appropriate in practice.

Tags

# WACC: should the new issue of debt be averaged?


# WACC: should the new issue of debt be averaged?












If a company already has debt in the amount of 3M with the cost of debt of 10% before taxes and common shares in the amount of 4M with the cost of equity of 8% and then decides to raise more money with another debt in the amount of 3M with the cost of debt 9% before tax, should it average the cost of debt in the formula or simply add it? Tax rate is 20%.

WACC = 3/10*10%*(1-0.20) + 4/10*8% + 3/10*9%*(1-0.20)

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.