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Basic Question 3 of 14
A firm has a total asset value of $1 million and debt valued at $400,000. What is the weighted average cost of capital if the after-tax cost of debt is 12% and the cost of equity is 15%?
B. 13.8%
C. 27.0%
A. 13.2%
B. 13.8%
C. 27.0%
User Contributed Comments 9
| User | Comment |
|---|---|
| morpheus918 | If total value equals 1 mm, wouldn't equity have to be 1.4 mm to offset the debt? |
| min | The value here means the asset value, not equity value. |
| JP09 | Assets = Liabilities + Equity $1,000,000 = $400,000 + $600,000 (.12*.40) + (.15*.60) = 4.8% + 9% = 13.8% |
| Nikita | why is everything divided by 1MM |
| flobeebhead | Nikita, you are looking for the ratio of debt to equity |
| bodduna | Total value(Equity + Debt) = 1mill. |
| 2014 | Wd rd + We re that is weight of debt * cost of debt + weight of equity * cost of equity |
| cfastudypl | you can also: 0.12*400 + 0.15*600=138/1000=0.1380*100=13.8% |
| perezma | i guess we forgot about tax |
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Learning Outcome Statements
calculate and interpret the weighted-average cost of capital for a company
CFA® 2024 Level I Curriculum, Volume 2, Module 6.