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 there are no taxes.

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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, E = $300 million, D = $200 million, V = $500 million, Re = 19%, and Rd = 9%. WACC = ($300/$500 * 19%) + ($200/$500 * 9%) = 15%.

You Are Analyzing the Cost of Capital for a Firm