A REIT has expected total return on equity of 15%, interest on their debt is 9%, and their debt-to-total-value ratio is 40%. What is the REIT's average cost of capital?
A) 9.0%
B) 10.4%
C) 12.6%
D) 15.0%
E) Insufficient information to answer this question.

Question

Quizplus · Accepted Answer

The average cost of capital is calculated using the weighted average cost of capital (WACC) formula: WACC = (E/V * Re) + (D/V * Rd), where E is equity, V is total value, Re is return on equity, D is debt, and Rd is cost of debt. Here, E/V = 60%, D/V = 40%, Re = 15%, and Rd = 9%. So, WACC = (0.6 * 15%) + (0.4 * 9%) = 12.6%.

A REIT Has Expected Total Return on Equity of 15