How firms estimate their cost of capital: 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?

Question

Quizplus · Accepted Answer

The formula to calculate WACC is: WACC = (cost of equity x weight of equity) + (cost of debt x weight of debt)

Plugging in the given values, we get: 
19.75% = (cost of equity x 0.75) + (7% x 0.25)

Solving for the cost of equity, we get: 
Cost of equity = (19.75% - 1.75%) / 0.75

Cost of equity = 24%

Therefore, the answer is B.

How Firms Estimate Their Cost of Capital: the WACC for a Firm