A firm's capital is 40% debt and 60% equity. The company's cost of debt is 6% while its cost of equity is 12%. Its cost of capital is 9.6%.

Question

Quizplus · Accepted Answer

This is correct. The weighted average cost of capital formula (WACC) is (% of debt x cost of debt) + (% of equity x cost of equity). In this case, the WACC would be (0.4 x 0.06) + (0.6 x 0.12) = 0.024 + 0.072 = 0.096 or 9.6%.

A Firm's Capital Is 40% Debt and 60% Equity