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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%?

A. 13.2%
B. 13.8%
C. 27.0%
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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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Craig Baugh

Learning Outcome Statements

calculate and interpret the weighted-average cost of capital for a company

CFA® 2025 Level I Curriculum, Volume 2, Module 6.