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Cost of Equity5%Cost of debt7%% Debt60% % Equity40%Given the data in the above table, what is the weighted average cost of capital of this company?4.0%3.7%5.9%6.2%

Question

Cost of Equity5%Cost of debt7%% Debt60% % Equity40%Given the data in the above table, what is the weighted average cost of capital of this company?4.0%3.7%5.9%6.2%

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Solution

The weighted average cost of capital (WACC) can be calculated using the formula:

WACC = (% Equity * Cost of Equity) + (% Debt * Cost of Debt * (1 - Tax Rate))

However, in this case, we are not given a tax rate, so we will assume it to be 0. This simplifies our formula to:

WACC = (% Equity * Cost of Equity) + (% Debt * Cost of Debt)

Substituting the given values into the formula:

WACC = (0.40 * 0.05) + (0.60 * 0.07)

WACC = 0.02 + 0.042

WACC = 0.062 or 6.2%

So, the weighted average cost of capital of this company is 6.2%.

This problem has been solved

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