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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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  • $\begingroup$ 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. $\endgroup$
    – noob2
    Feb 26 '20 at 9:56
  • $\begingroup$ 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 $\endgroup$ Feb 26 '20 at 16:35
  • $\begingroup$ 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. $\endgroup$
    – noob2
    Feb 26 '20 at 18:45

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