Worked example — European Industrial Co (a middle-market industrial business): CoE 11%, pretax cost of debt 5%, tax rate 25%, target D/E = 0.5. Calculate WACC.

D/V = 0.5 / 1.5 = 33.3%. E/V = 1 / 1.5 = 66.7%. After-tax cost of debt = 5% × (1 − 0.25) = 3.75%. WACC = 0.333 × 3.75% + 0.667 × 11% = 1.25% + 7.33% = 8.58%. Sanity check: ~8.6% is plausible for a mid-cap industrial business. At higher leverage (D/E 1.0): WACC drops slightly to ~8.2% due to a larger tax-shield share — until distress risk drives CoE and cost of debt up (U-curve).