Question

The capital structure of Ridley Enterprises is: Debt 40%, Equity 60%. The cost of debt is 13%, and the cost of equity is 16.5%. What is the weighted average cost of capital for Ridley Enterprises?

a) 14.2%
b) 15.3%
c) 14.8%
d) 15.9%

Answer 1

The weighted average cost of capital (WACC) for Ridley Enterprises is calculated by combining the cost of each component (debt and equity) adjusted for their respective percentage weights in the capital structure, yielding a WACC of 15.1%, which is not listed in the provided options.

Step-by-step explanation:

The question asks us to calculate the weighted average cost of capital (WACC) for Ridley Enterprises given a capital structure of 40% debt and 60% equity, with cost of debt being 13% and cost of equity being 16.5%. The WACC is found by multiplying the cost of each component by its respective weighting in the capital structure, and then summing these products.

The calculation is as follows:

• WACC = (% Debt × Cost of Debt) + (% Equity × Cost of Equity)
• WACC = (0.40 × 0.13) + (0.60 × 0.165)
• WACC = 0.052 + 0.099
• WACC = 0.151 or 15.1%

Therefore, the answer is neither of the provided options a) 14.2%, b) 15.3%, c) 14.8%, nor d) 15.9%, but the correct WACC for Ridley Enterprises is 15.1%.