# 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)

• Are you aware that if the company doubles the amount of debt, the Cost of Equity is no longer going to be the 8% that it was before? The Equity is now riskier. Feb 26 '20 at 9:56
• I was thinking about that possibility as well, however, there was no meaningful formula I could use as, for example, the M&M theorem assumes that any extra debt is used to repurchase shares, however, in this example, there is no change to shares Feb 26 '20 at 16:35
• OK, it is good that you are aware of the issue. I am not a Corporate Finance guy, so I can't help any further. Feb 26 '20 at 18:45