The overall cost of capital for Canton Corporation is 10%. The firm is financed with 30% debt that offers a promised return of 15% and has an expected return of 8%. Canton is in the 40% marginal tax bracket.
-Refer to the information above. What is Canton's weighted average cost of capital?

Question

Quizplus · Accepted Answer

The correct answer is A. The weighted average cost of capital (WACC) is calculated as follows:WACC = (Weight of debt * Cost of debt * (1 - Tax rate)) + (Weight of equity * Cost of equity)WACC = (0.30 * 0.15 * (1 - 0.40)) + (0.70 * 0.08)WACC = (0.045 * 0.60) + (0.056)WACC = 0.027 + 0.056WACC = 0.090 or 9.0%

The Overall Cost of Capital for Canton Corporation Is 10