A firm has a weighted average cost of capital of 11.68 percent and a cost of equity of 15.5 percent. The debt-equity ratio is 0.

Question

2 years ago

13

65. There are no taxes. What is the firm's cost of debt

1 answer:

asambeis [7] · Answer 1 · 2023-03-30T01:15:45+03:00

The firms Cost of Debt is 9.62%.

Data and Calculations:

Weighted average cost of capital = 11.68%

Cost of equity = 15.5%

Debt-Equity Ratio = 0.65

Without taxes, the firm's Weighted Cost of Debt (WACC) = WACC - Weighted Cost of Equity

= 11.68% - (15.5% (1 - 0.65)

= 11.68% - 5.425%

= 6.255%

Unweighted cost of debt = 6.255%/0.65

= 9.62%

Thus, the firm's cost of debt is 9.62% while the weighted cost of debt is 6.255%.