Answer :
the cost of capital for a firm with a 60/40 debt/equity split, 2.23% cost of debt, 15% cost of equity, and a 35% tax rate would be 6.86%
What is cost of debt?
The cost of debt may be represented as either the before-tax cost of debt, which is the amount owed by the company before taxes, or the after-tax cost of debt.
What is cost of capital?
The cost of capital, which includes both debt and equity prices, is used to assess a company's new projects. It is the lowest rate of return that investors anticipate in exchange for lending money to businesses, establishing a standard that new projects must achieve.
Given
Weight of debt = 60% or 0.60
Weight of equality = 40% or 0.40
Cost of Debt= 2.23%
Cost of equity= 15%
Tax rate = 35% or 0.35
Cost of capital= [ Cost of equality× weight of equality] + [ cost of debt× weight of debt× (1 -tax rate)]
= [ 15% × 0.40] + [2.23% × 0.60 × (1 - 0.35)]
= 6% + [ 1.338% × 0.65]
=6% + 0.8697%
= 6.86%
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