A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions: The weighted average cost of capital is ________.
A) 6 percent
B) 10.7 percent
C) 11 percent
D) 15 percent

Question

A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions:  The weighted average cost of capital is ________.
A) 6 percent 
B) 10.7 percent 
C) 11 percent 
D) 15 percent

Quizplus · Accepted Answer

To find the weighted average cost of capital (WACC), we need to multiply the cost of each source of capital by their target market value proportion and then sum them up. 
WACC = (0.4 x 0.08) + (0.1 x 0.12) + (0.5 x 0.14) = 0.032 + 0.012 + 0.07 = 0.114 or 11.4%
Therefore, the closest answer is C, which is 11 percent.

A Firm Has Determined Its Cost of Each Source of Capital