1. The cost of capital for a firm with a 60/40 debt/equity split, 2.93% cost of...

1. The cost of capital for a firm with a 60/40 debt/equity split, 2.93% cost of debt, 15% cost of equity, and a 35% tax rate would be

2. Complete the following sentence. The WACC _________________.

Group of answer choices

a. Is equal to the firm’s embedded debt cost times (1- the tax rate).

b. Is directly observable in financial markets.

c. Is the required return on any investments a firm makes that have a level of risk greater than that of present operations.

d. For a firm represents the risk and target capital structure of the firm’s existing assets as a whole.

Solutions

Expert Solution

WACC = After tax cost of debt*Weight of debt + Cost of Equity*Weight of Equity

= 2.93%*(1-35%)*60% + 15%*40%

= 7.1427%

i.e. 7.14%

d. For a firm represents the risk and target capital structure of the firm’s existing assets as a whole.

jeff jeffy answered 2 years ago

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