Case Study 15.2
A distributing company has financed an expansion requiring $50 million as shown in table below even though historically the company has financed any capital requirement with 20% debt at 12% interest and 80% equity with a 8% rate of return.
$$\begin{array} { | l | l | l | }
\hline \text { Source of capital } & \text { Amuunt } & \text { Interest Rate/ Dividend } \
\hline \text { Stocks } & \$ 16 \mathrm { M } & 8 \% \
\hline \text { Retaired eariirgs } & \$ 25 \mathrm { M } & 10 \% \
\hline \text { Bonds } & \$ 9 \mathrm { M } & 6 \% \
\hline
\end{array}$$
-What is the weighted average cost of capital based on current financing?
A) 6.4%
B) 8.2%
C) 8.64%
D) 9.3%

Question

Case Study 15.2
A distributing company has financed an expansion requiring $50 million as shown in table below even though historically the company has financed any capital requirement with 20% debt at 12% interest and 80% equity with a 8% rate of return.
 $$\begin{array} { | l | l | l | } 
\hline \text { Source of capital } & \text { Amuunt } & \text { Interest Rate/ Dividend } \
\hline \text { Stocks } & \$ 16 \mathrm { M } & 8 \% \
\hline \text { Retaired eariirgs } & \$ 25 \mathrm { M } & 10 \% \
\hline \text { Bonds } & \$ 9 \mathrm { M } & 6 \% \
\hline
\end{array}$$
-What is the weighted average cost of capital based on current financing?
A) 6.4%
B) 8.2%
C) 8.64%
D) 9.3%

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated by multiplying the cost of each capital component by its proportional weight and then summing: WACC = (16/50 * 8%) + (25/50 * 10%) + (9/50 * 6%) = 8.64%.

Case Study 15 -What Is the Weighted Average Cost of Capital Based on Requiring