Asked by Juyee Kamat on Jul 07, 2024
Verified
A firm's capital is 40% debt and 60% equity. The company's cost of debt is 6% while its cost of equity is 12%. Its cost of capital is 9.6%.
Cost of Capital
The necessary yield a business must secure on its ventures to sustain its valuation in the marketplace and raise capital.
Cost of Equity
The return that investors require for their investment in a company, essentially the amount a firm must pay to retain its equity investors.
- Comprehend the significance of the cost of capital in project evaluation and its calculation.
Verified Answer
AE
Aliea EdnieJul 09, 2024
Final Answer :
True
Explanation :
This is correct. The weighted average cost of capital formula (WACC) is (% of debt x cost of debt) + (% of equity x cost of equity). In this case, the WACC would be (0.4 x 0.06) + (0.6 x 0.12) = 0.024 + 0.072 = 0.096 or 9.6%.
Learning Objectives
- Comprehend the significance of the cost of capital in project evaluation and its calculation.