A firm has $300 million in outstanding debt and $900 million in outstanding equity. Its cost of equity is 11%, and its cost of debt is 7%. What is the appropriate WACC?

Question

Quizplus · Accepted Answer

The WACC is calculated as (E/V * Re) + (D/V * Rd * (1-T)), where E is equity, D is debt, V is total value (E+D), Re is cost of equity, Rd is cost of debt, and T is the tax rate. Assuming no taxes, WACC = (900/1200 * 11%) + (300/1200 * 7%) = 10%.

A Firm Has $300 Million in Outstanding Debt and $900