Question

A firm has $76,000,000 in debt, which accounts for 43% of their total funds raised; the after-tax cost of these funds is 6.10%. The same firm has $100 million in common stock, which accounts for 57% of their total funds raised; their after-tax costs (including transaction costs) are 15.7%. What is the weighted average cost of capital for these funds?

10.21%
8.92%
2.63%
11.55%

Answer 1

11.55% is the weighted average cost of capital for these funds

Explanation:

Firm has 76000000 in debt and 100000000 in equity. Thus the proportion of debt =

             = 76000000/(76000000 + 100000000)

             = 43.18%

and proportion of equity =  1 - 43.18%  = 56.82%

Therefore, WACC =  0.4318 * 6.1 + 0.5682 * 15.7

                               = 11.55%