The company cost of capital for a firm with a 60/40 debt/equity split, 8% cost of debt, 15% cost of equity, and a 35% tax rate would be:

Question

Quizplus · Accepted Answer

To calculate the cost of capital, we use the weighted average cost of capital (WACC) formula:
WACC = (E/V) × Re + (D/V) × Rd × (1 - Tc)
Where:
E/V = percentage of equity
Re = cost of equity
D/V = percentage of debt
Rd = cost of debt
Tc = corporate tax rate

Plugging in the numbers, we get:
WACC = (0.4 × 0.15) + (0.6 × 0.08) × (1 - 0.35)
WACC = 0.06 + 0.0312
WACC = 0.0912 or 9.12%
Therefore, the answer is choice B.

The Company Cost of Capital for a Firm with a 60/40