The M&M Company is financed by $4 million (market value) in debt and $6 million (market value) in equity. The cost of debt is 5% and the cost of equity is 10%. Calculate the weighted average cost of capital. (Assume no taxes.)
A) 10%
B) 15%
C) 8%
D) None of the above

Question

Quizplus · Accepted Answer

Weighted Average Cost of Capital (WACC) = (Weight of Debt * Cost of Debt) + (Weight of Equity * Cost of Equity)
Weight of Debt = 4 / (4+6) = 0.4 or 40%
Weight of Equity = 6 / (4+6) = 0.6 or 60%
WACC = (0.4 * 0.05) + (0.6 * 0.1) = 0.02 + 0.06 = 0.08 or 8%

The M&M Company Is Financed by $4 Million (Market Value)