A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions: The weighted average cost of capital is
A) 6 percent.
B) 10.7 percent.
C) 11 percent.
D) 15 percent.

Question

A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions:  The weighted average cost of capital is
A) 6 percent. 
B) 10.7 percent. 
C) 11 percent. 
D) 15 percent.

Quizplus · Accepted Answer

Based on the given target market value proportions and cost of each source of capital, the weighted average cost of capital (WACC) can be calculated as follows:
WACC = (0.4 x 0.04) + (0.3 x 0.12) + (0.3 x 0.18)
WACC = 0.016 + 0.036 + 0.054
WACC = 0.106 or 10.6%
Therefore, the best choice is C, which is the closest option to the calculated WACC of 10.6%.

A Firm Has Determined Its Cost of Each Source of Capital