Question

The cost of capital for a firm with a 60/40 debt/equity split, 4.86% cost of debt, 15% cost of equity, and a 35% tax rate would be:______.

Answer 1

Answer: 7.9%

Step-by-step explanation:

The weighted cost of capital for a firm shows the cost of capital from all sources that fund the business including stock and long term liabilities.

Formula is:

= (Weight of equity * cost of equity) + (Weight of debt * (cost of debt * (1 - tax rate) ))

= (0.4 * 0.15) + ( 0.6 * ( 0.0486 * ( 1 - 35%)))

= 0.06 + 0.018954

= 7.895%

= 7.9%