How companies estimate their cost of capital: You are analysing the cost of capital for a company that is financed with $300 million of equity and $200 million of debt. The cost of debt capital for the company is 9 percent, while the cost of equity capital is 19 percent. What is the overall cost of capital for the company?

Question

Quizplus · Accepted Answer

To calculate the overall cost of capital, we need to use the weighted average cost of capital (WACC) formula: WACC = (E/V x Re) + (D/V x Rd) x (1 - T), where E = equity, D = debt, V = total value (equity + debt), Re = cost of equity, Rd = cost of debt, and T = corporate tax rate.

Plugging in the given values, we get:

WACC = (0.6 x 0.19) + (0.4 x 0.09) x (1 - 0)
WACC = 0.114 + 0.036
WACC = 0.15 or 15.0%

Therefore, the best choice is C) 15.0%.

How Companies Estimate Their Cost of Capital: You Are Analysing