Question

The cost of capital for a firm with a 60/40 debt/equity split, 3.49% cost of debt, 15% cost of equity, and a 35% tax rate would be

Answer 1

The cost of capital of the firm with the level of debt and equity is  7.36%.

What is the cost of capital?

The cost of capital is the rate of return investors would demand for giving a company money for production activities. The weghted average cost of capital formula would be used to determine the firm's cost of capital.

WACC = [weight of equity x cost of equity] + weight of debt x cost of debt x (1 - tax rate)

[(0.4 x 15%)] + [0.6 x 0.65 x 3.49)

6% + 1.36 = 7.36%

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