SIROM Scientific Solutions has $12 million of outstanding equity and $4 million of bank debt. The bank debt costs 4% per year. The estimated equity beta is 1. If the market risk premium is 8% and the risk-free rate is 4%, compute the weighted average cost of capital if the firm's tax rate is 30%.

Question

Quizplus · Accepted Answer

C) Cost of debt = rate on bank debt
Cost of equity = Risk-free rate + Beta × Market risk premium 11eaabab_c080_df8b_b90e_0f1f2fc6bda3_TB5536_11 Weight of debt = 1- Weight of equity. 11eaabab_c080_df8c_b90e_2d668e7b0010_TB5536_00 Cost of equity = 0.04 + 1 × 0.08 = 0.12 or 12%
Weight of equity= 12/(12 + 4) = 0.75 or 75%
Weight of debt = 1 - 0.75 = 0.25 or 25% 11eaabab_c081_069d_b90e_d11a3f8a9842_TB5536_00

SIROM Scientific Solutions Has $12 Million of Outstanding Equity and $4