The WACC for a firm is 19.75 percent. You know that the firm is financed with $75 million of equity and $25 million of debt. The cost of debt capital is 7 percent. What is the cost of equity for the firm? Assume there are no taxes.

Question

Quizplus · Accepted Answer

WACC = (E/V) x Re + (D/V) x Rd x (1-T)
where, 
E = Equity
D = Debt
V = Total value of firm (V = E + D)
Re = Cost of Equity
Rd = Cost of Debt
T = Tax Rate (assumed to be zero in this question)

Given, WACC = 19.75%
E = $75 million
D = $25 million
Rd = 7%

Since we have to find Re, let's rearrange the WACC equation as follows:

Re = (WACC x V - Rd x D) / E
= (0.1975 x ($75+$25) - 0.07 x $25) / $75
= 0.24 or 24.00%

Hence, the cost of equity (Re) for the firm is 24.00%.

The WACC for a Firm Is 19