Assume a firm is financed with $1,000 debt that has a market beta of 0.05 and $3,000 of equity with a beta of 1.4. If the risk-free rate is 5% and the equity premium is 6%, what is the cost of
Capital of the firm? Round your answer to the nearest tenth of a percent.

Question

Quizplus · Accepted Answer

The correct answer is A because the cost of capital of the firm is 11.4%. The cost of debt is 5% + 0.05 * 6% = 5.3%. The cost of equity is 5% + 1.4 * 6% = 14.4%. The weighted average cost of capital is (1000/4000 * 5.3%) + (3000/4000 * 14.4%) = 11.4%.

Assume a Firm Is Financed with $1,000 Debt That Has