If a firm has total assets of $10 million,stockholder's equity of $6 million,a cost of equity of 10,and an after tax cost of debt of 5%,what is the firm's weighted average cost of capital?
A) 8
B) 18
C) 7
D) 1

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)where:E = market value of equityV = total value of the firmRe = cost of equityD = market value of debtRd = cost of debtTc = corporate tax rateIn this case, we have:E = $6 millionV = $10 millionRe = 10%D = $4 millionRd = 5%Tc = 0%Therefore, the WACC is:WACC = (6/10) * 10% + (4/10) * 5% * (1 - 0%)= 8%

If a Firm Has Total Assets of $10 Million,stockholder's Equity