What would be the weighted average cost of capital for Limp Linguini Noodle Makers, Inc.under the following conditions:
*The capital structure is 40% debt and 60% equity
*The before-tax cost of debt (which includes flotation costs) is 20% and the firm is in the 40% tax bracket
*The firm's beta is 1.7
*The risk-free rate is 7% and the market risk premium is 6%

Question

Quizplus · Accepted Answer

Determine the cost of equity: 1.7(6%) + 7% = 17.2%
Determine the cost of debt: 20% × 0.60 = 12
Determine the weighted cost of capital: 17.2(0.60) + 12(0.40) = 15.12%

What Would Be the Weighted Average Cost of Capital for Limp