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%
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%.
Similar Questions
The book value of Charcoal Corporation’s common equity is $10 million, and it has 1 million shares outstanding. The book value as well as market value of its risk-free debt is $10 million. The stock is currently trading at $20 per share. The beta of the company’s common stock is 1, and the market risk premium is 8%. If the risk-free Treasury bill rate is 4%, and the corporate tax rate is 0%, what is the company's (after-tax) weighted-average cost of capital?Group of answer choices8%None of the above10.5%9.5%9.33
Calculate the cost of capital for an all-equity firm with equity of $225,000 and expected earnings of $35,000.Multiple choice question.9.6%12.4%16.5%15.6%
Calculate the cost of capital for an all-equity firm with equity of $12,500 and expected earnings of $1,900.Multiple choice question.6.6%16.5%14.4%15.2%
Change in Cost of CapitalImagine a company whose capital structure has ₹50 crore equity and ₹50 crore debt in Year 1. The company earned a profit of ₹30 crore at the start of Year 2 and decided to repay the debt.The company’s capital structure in Year 2 became ₹80 crore equity and ₹20 crore debt.What will be the WACC for Year 1 and Year 2 if the cost of debt is 7.5% and the cost of equity is 14%?10.75%, 10.75%10.75%, 12.70%12.70%, 12.70%
What is the company cost of capital for a firm financed with 30% debt if the debt requires a 10% return and equity requires a 16% return?
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.