The M&M Company is financed by $10 million in debt (market value)and $40 million in equity (market value). The cost of debt is 10 percent and the cost of equity is 20 percent. Calculate the weighted average cost of capital assuming no taxes.

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated by weighting the cost of each type of capital (debt and equity) by its proportion in the firm's capital structure and then summing these results. Here, WACC = (Debt/Total Capital) * Cost of Debt + (Equity/Total Capital) * Cost of Equity = ($10 million/$50 million) * 10% + ($40 million/$50 million) * 20% = 0.2 * 10% + 0.8 * 20% = 2% + 16% = 18%.

The M&M Company Is Financed by $10 Million in Debt