Smile Industries capital structure consists of $1,000,000 of debt at 6 percent interest and 1,500,000 of stockholders equity at 2 percent. The average cost of capital of Smile Industries is

Question

Quizplus · Accepted Answer

To find the average cost of capital, we need to calculate the weighted average cost of debt and equity.

Weighted cost of debt = (debt / total capital) * interest rate = (1,000,000 / 2,500,000) * 6% = 0.024 or 2.4%

Weighted cost of equity = (equity / total capital) * required return = (1,500,000 / 2,500,000) * 2% = 0.012 or 1.2%

Average cost of capital = cost of debt + cost of equity = 2.4% + 1.2% = 3.6%

Therefore, the best choice is D.

Smile Industries Capital Structure Consists of $1,000,000 of Debt at 6