Assume the following facts about a firm's financing in the next year: The weighted cost of capital of this project is:

Question

Assume the following facts about a firm's financing in the next year:  The weighted cost of capital of this project is:

Quizplus · Accepted Answer

The weighted cost of capital can be calculated using the formula: WACC = (E/V * Re) + ((D/V * Rd) * (1-T)), where E is equity, D is debt, V is the total value of the firm (E + D), Re is the cost of equity, Rd is the cost of debt, and T is the tax rate.
Since no information is given about the values of E, D, or the tax rate, we can assume that they are equal to the total value of the firm, $1,000,000, and zero, respectively.
Therefore, the WACC can be simplified to: WACC = (1.0 * Re) + (0.0 * Rd) = Re.
Solving for Re in the equation 11 = (0.4 * Re) + (0.6 * 8), we get Re = 11.3%.
Therefore, the best choice is C.

Assume the Following Facts About a Firm's Financing in the Next