A firm plans to raise $4 million by issuing bonds and $1 million by issuing stock. The firm's cost of debt is 5 percent and its cost of equity is 10 percent. What is its composite cost of capital?

Question

Quizplus · Accepted Answer

The composite cost of capital is calculated by taking the weighted average of the cost of debt and the cost of equity. Here, the total capital is $5 million ($4 million from bonds + $1 million from stock). The weighted cost of debt is ($4 million / $5 million) * 5% = 4%, and the weighted cost of equity is ($1 million / $5 million) * 10% = 2%. Adding these together gives a composite cost of capital of 6%.

A Firm Plans to Raise $4 Million by Issuing Bonds