Question

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?

a. 19.75%
b. 24.00%
c. 32.50%
d. 58.00%

Answer 1

Answer:

b. 24.00%

Explanation:

The formula to compute WACC is shown below:

WACC = Weightage of debt × cost of debt + (Weightage of  common stock) × (cost of common stock)

19.75% = (0.25 × 7%)  +  (0.75 × cost of equity)

19.75% = 1.75% +  (0.75 × cost of equity)

18% =   (0.75 × cost of equity)

So, the cost of equity would be = 24%

Weighted of debt = ($25 million ÷ $100 million) = 0.25

And, the weighted of common stock = (Common stock ÷ total firm)

                                                              = $75 million ÷ $100 million

                                                              = 0.75