A firm has a weighted average cost of capital of 11.28 percent and a cost of equity of 14.7 percent.The debt-equity ratio is .72.There are no taxes.What is the firm's cost of debt?
A)6.53 percent
B)6.27 percent
C)6.44 percent
D)7.23 percent
E)7.08 percent

Question

Quizplus · Accepted Answer

The WACC formula without taxes is: WACC = (E/V) * Re + (D/V) * Rd. Given WACC = 11.28%, Re = 14.7%, and D/E = 0.72, we find V = E + D = 1.72E. Thus, E/V = 1/1.72 and D/V = 0.72/1.72. Solving for Rd gives Rd = 6.53%.

A Firm Has a Weighted Average Cost of Capital of 11.28