Question

The shareholders need to earn 20%. The firm can borrow at 5%. The risk free rate is 2%. The tax rate is 40%. Find the weighted average cost of capital.

Answer 1

Answer:

11.5%

Explanation:

The computation of the weighted average cost of capital is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of  common stock) × (cost of common stock)

= (0.50 × 5%) × ( 1 - 40%) +  (0.50 × 20%)

= 1.5% + 10%

= 11.5%

Basically we multiplied the weightage of capital structure with its cost so that the weighted average cost of capital could come