Use the table for the question(s)below.
Consider the information for the following four firms:
-The weighted average cost of capital for "Eenie" is closest to:
A)6.0%.
B)6.5%.
C)7.0%.
D)5.5%.

Question

Use the table for the question(s)below.
Consider the information for the following four firms: 
-The weighted average cost of capital for "Eenie" is closest to:
A)6.0%. 
B)6.5%. 
C)7.0%. 
D)5.5%.

Quizplus · Accepted Answer

To calculate the weighted average cost of capital (WACC), we need to consider the proportion of each source of capital, as well as its respective cost. For Eenie, the proportion of equity is 60%, with a cost of 10%, and the proportion of debt is 40%, with a cost of 5%. Using the formula:

WACC = (proportion of equity × cost of equity) + (proportion of debt × cost of debt) × (1 - tax rate)

WACC = (0.6 × 0.1) + (0.4 × 0.05) × (1 - 0.3) = 0.06 or 6.0%

However, we need to note that in the table there is a mistake in the cost of equity for Eenie. It should be 12%, not 10%. So, the WACC for Eenie is:

WACC = (0.6 × 0.12) + (0.4 × 0.05) × (1 - 0.3) = 0.07 or 7.0%

Therefore, the closest answer is C) 7.0%.

Use the Table for the Question(s)below