The ABC Company is planning a $64 million expansion.The expansion is to be financed by selling $25.6 million in new debt and $38.4 million in new common stock.The before-tax required rate of return on debt is 9 percent and the required rate of return on equity is 14 percent.If the company is in the 35 percent tax bracket,what is the firm's cost of capital?

Question

Quizplus · Accepted Answer

The firm's cost of capital is calculated using the weighted average cost of capital (WACC) formula: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)), where E is equity, D is debt, V is total value (E+D), Re is the cost of equity, Rd is the cost of debt, and Tc is the tax rate. Plugging in the values: WACC = ($38.4M/$64M * 14%) + ($25.6M/$64M * 9% * (1-0.35)) = 10.74%.

The ABC Company Is Planning a $64 Million Expansion