ABC Corporation is a leveraged company. The cost of equity capital for ABC is 10%, its corporate income tax rate is 30%,, and the firm's before tax-cost of borrowing is 5%.
-If ABC's debt-to-equity ratio is 1:1,then its weighted average cost of capital,K,is: (Do not round intermediate calculations and round your percentage final answer to 2 decimal places.)

Question

Quizplus · Accepted Answer

Debt-to-equity ratio of 1: 1 means the firm is 50% financed with debt.K = (1 - 0.50) × 0.1 + 0.50 × (1 - 0.30) × 0.05= 0.50 × 0.1 + 0.50 × 0.70 × 0.05= 0.05 + 0.0175= 0.0675= 6.75%

ABC Corporation Is a Leveraged Company