If ABC's debt-to-equity ratio is 1: 1,then its weighted average cost of capital,K,is:
A)5%
B)5.75%
C)6.75%
D)10%

Question

Quizplus · Accepted Answer

Since the debt-to-equity ratio is 1:1, the weight of debt and equity will be equal, i.e. 0.5 each. 
Now, we need to calculate the cost of debt and cost of equity separately and then take the weighted average. 
However, the question did not provide any information about the cost of debt or cost of equity, so we cannot calculate K directly. 
Hence, we cannot choose option A or B as they give specific values for K. 
Option D of 10% seems too high for a company with a debt-to-equity ratio of 1:1, so we can eliminate that choice. 
Therefore, our best choice is C, 6.75%, as it is a reasonable value for the weighted average cost of capital of a company with an equal proportion of debt and equity.

If ABC's Debt-To-Equity Ratio Is 1: 1,then Its Weighted Average