If XYZ's debt-to-total-market-value ratio is 40%,then its weighted average cost of capital,K,is:
A)8%
B)9%
C)10%
D)12%

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is the rate of return that a company is expected to pay on average to all its security holders to finance its assets. It is calculated by taking into account the proportion of each source of financing (i.e., debt and equity) in the company's capital structure, as well as the cost of each source.

If XYZ's debt-to-total-market-value ratio is 40%, it means that 40% of the company's total market value is financed through debt. Therefore, the remaining 60% is financed through equity.

To calculate XYZ's WACC, we need to find the cost of debt and the cost of equity, and then weight them according to their proportion in the capital structure.

Assuming that the cost of debt for XYZ is 8% and the cost of equity is 12%, we can calculate the WACC as follows:

WACC = (0.40 x 8%) + (0.60 x 12%) = 3.20% + 7.20% = 10%

Therefore, the best choice is C) 10%.

If XYZ's Debt-To-Total-Market-Value Ratio Is 40%,then Its Weighted Average Cost