Question

The common stock and debt of Windows Phone Corp. are valued at $48 million and $31 million, respectively. Investors currently require a 11% return on the common stock and a 3% return on the debt. There are no taxes. Calculate the weighted average cost of capital. Enter your answer as a percentage rounded to two decimal places. Do not include the percentage sign in your answers.

Answer 1

The weighted average cost of capital is a financial metric that represents the average rate of return required by investors for investing in a company. It takes into account the cost of both equity and debt financing. In this case, the weighted average cost of capital is 6.67%.

Step-by-step explanation:

The weighted average cost of capital is a financial metric that represents the average rate of return required by investors for investing in a company. It takes into account the cost of both equity and debt financing. To calculate the weighted average cost of capital:

1. Calculate the weight of each component (common stock and debt) by dividing the value of each component by the total value of all components of capital.
2. Multiply the weight of each component by the required rate of return for that component.
3. Add up the weighted returns for all components to get the weighted average cost of capital.

In this case, the weighted average cost of capital would be:

Weight of equity = $48 million / ($48 million + $31 million) = 0.607

Weight of debt = $31 million / ($48 million + $31 million) = 0.393

Weighted average cost of capital = (0.607 * 11%) + (0.393 * 3%) = 6.67%