Question

Omni Consumer Products (OCP) has equity with a market value of $900 million and debt with a value of $600 million. If OCP’s cost of equity is 18% and its weighted average cost of capital is 13%, what is OCP’s cost of debt? Assume no taxes.

a. 5.5%
b. 8.0%
c. 11.5%
d. 16.3%
e. 23.8%

Answer 1

a. 5.5%

Step-by-step explanation:

The computation of the cost of debt is shown below:

The Total market value is

= $900 + $600

= $1,500

Now

WACC = Cost of equity × Equity market value ÷ Total market value + Cost of debt × Market value of debt ÷ Total market value

13% = 18% × $900 ÷ $1,500 + Cost of debt × $600 ÷ $1,500

13% = 10.80% + Cost of debt × 0.4

Cost of debt = (13% - 10.80%) ÷ 0.4

= 5.5%

Hence, the cost of debt is 5.5%

Therefore the correct option is a.