Question
Download Solution PDFSuppose that a firm has 20% debts and 80% equity in its capital structure. The cost of debts and cost of equity are assumed to be 10% and 15% respectively, What is the overall cost of capital?
Answer (Detailed Solution Below)
Detailed Solution
Download Solution PDFA firm’s Weighted Average Cost of Capital (WACC) represents its blended cost of capital across all sources, including common shares, preferred shares, and debt.
The cost of each type of capital is weighted by its percentage of total capital and they are added together.
WACC = (10 x 0.20) + (15 x 0.80)
∴ WACC = 2 + 12
∴WACC = 14%
The overall cost of capital is 14%.
Thus, option 4 is the correct answer.
Last updated on Jun 12, 2025
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