Question

If in a firm equity and debt are
in equal proportion (50% each)
and cost of equity is 17% and after
tax cost of debt is 5%, WACC would
be -
Answer
A. 11%
B. 12%
C. 15%
D.22%​

Answer 1

Answer:

A) 11%.

WACC = 11%.

Explanation:

Given:

1. Firm equity and debt weightage ratio = 50:50
2. Cost of Equity = 17%
3. Cost of debt = 5%

Calculation of Weighted average cost of capital (WACC):

= cost of respective capital source × Corresponding weight.

i.e. Cost of equity × weight of equity + Cost of debt × Weight of debt.

i.e. 17%(50%)+ 5%(50%) = 11%

WACC is the composite or overall cost of capital of a firm.