The shareholders need to earn 20%. The firm can borrow at 5%. The risk free rate is 2%. The tax rate is 40%. Find the weighted average cost of capital.

11.5%

Explanation:

The computation of the weighted average cost of capital is shown below:

= Weightage of debt * cost of debt * (1 - tax rate) + (Weightage of common stock) * (cost of common stock)

= (0.50 * 5%) * (1 - 40%) + (0.50 * 20%)

= 1.5% + 10%

= 11.5%

Basically we multiplied the weightage of capital structure with its cost so that the weighted average cost of capital could come