How companies estimate their cost of capital: The WACC for a company is 13.00 percent. You know that the company's cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the company is financed with debt?

Question

Quizplus · Accepted Answer

The WACC formula is WACC = (E/V) * Re + (D/V) * Rd, where E is equity, D is debt, V is total value (E+D), Re is cost of equity, and Rd is cost of debt. Solving 13% = (E/V)*20% + (D/V)*10% with E/V + D/V = 1, we find D/V = 50%.

How Companies Estimate Their Cost of Capital: the WACC for a Company