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% and the cost of equity is 20%. Calculate the weighted average cost of capital assuming no taxes.

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated as: WACC = (E/V * Re) + (D/V * Rd), where E is the market value of equity, D is the market value of debt, V is the total market value (E + D), Re is the cost of equity, and Rd is the cost of debt. Here, E = $40 million, D = $10 million, V = $50 million. So, WACC = ($40/$50 * 20%) + ($10/$50 * 10%) = 16% + 2% = 18%.

The M & M Company Is Financed by $10 Million