A corporation has a total capital of $10,000,000 by issuing shares of stock worth $6,000,000, and...

A corporation has a total capital of $10,000,000 by issuing shares of stock worth $6,000,000, and by floating bonds worth $4,000,000. If the cost of debt is 8% and cost of equity is 14%, what is the weighted average cost of capital in the absence of corporate tax.

Expert Solution

Weight of debt = 4,000,000/10,000,000 = 40%

Weight of equity = 6,000,000/10,000,000 = 60%

WACC = 40% * 8% * (1 - 0%) + 60% * 14% = 3.2% + 8.40% = 11.60%

jeff jeffy answered 2 years ago

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