SIROM Scientific Solutions has $5 million of outstanding equity and $5 million of bank debt. The bank debt costs 4% per year. The estimated equity beta is 2. 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 35%.

Question

Quizplus · Accepted Answer

C) Cost of debt = rate on bank debt
Cost of equity = Risk-free rate + Beta × Market risk premium 11eaabab_c080_b878_b90e_4b45e1fd9ae4_TB5536_00 Weight of debt = 1- Weight of equity. 11eaabab_c080_df89_b90e_6f8e6171d241_TB5536_00 Cost of equity = 0.04 + 2 × 0.08 = 0.2 or 20%
Weight of equity = 5/(5 + 5) = 0.5 or 50%
Weight of debt = 1 - 0.5 = 0.5 or 50% 11eaabab_c080_df8a_b90e_0795b9f6f3c4_TB5536_00

SIROM Scientific Solutions Has $5 Million of Outstanding Equity and $5