Assume that XYZ Corporation is a leveraged company with the following information: If XYZ's debt-to-total-market-value ratio is 40%,then its weighted average cost of capital,K,is:

Question

Assume that XYZ Corporation is a leveraged company with the following information:  If XYZ's debt-to-total-market-value ratio is 40%,then its weighted average cost of capital,K,is:

Quizplus · Accepted Answer

The weighted average cost of capital (K) is the average cost of all the funding sources used by a company, weighted by their proportion in the capital structure. In this case, since the company is leveraged with a debt-to-total-market-value ratio of 40%, it means that 40% of the capital structure comes from debt and 60% comes from equity.

Assuming that the cost of debt is 8% and the cost of equity is 14%, the calculation for the weighted average cost of capital (K) would be:

K = (0.40 x 8%) + (0.60 x 14%) = 3.2% + 8.4% = 11.6%

Therefore, the best choice is C) 10% since it is the closest option to 11.6%.

Assume That XYZ Corporation Is a Leveraged Company with the Following