You are analyzing the cost of capital for a firm that is financed with $300 million of equity and $200 million of debt. The cost of debt capital for the firm is 9 percent, while the cost of equity capital is 19 percent. What is the overall cost of capital for the firm? Assume the firm pays no tax.

Question

Quizplus · Accepted Answer

The overall cost of capital is calculated using the weighted average cost of capital (WACC) formula: 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. Here, WACC = ($300M/$500M * 19%) + ($200M/$500M * 9%) = 15%.

You Are Analyzing the Cost of Capital for a Firm