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23 June, 21:59

The WACC for a firm is 19.75 percent. You know that the firm is financed with $75 million of equity and $25 million of debt. The cost of debt capital is 7 percent. What is the cost of equity for the firm?

a. 19.75%

b. 24.00%

c. 32.50%

d. 58.00%

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Answers (1)
  1. 23 June, 22:16
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    b. 24.00%

    Explanation:

    The formula to compute WACC is shown below:

    WACC = Weightage of debt * cost of debt + (Weightage of common stock) * (cost of common stock)

    19.75% = (0.25 * 7%) + (0.75 * cost of equity)

    19.75% = 1.75% + (0.75 * cost of equity)

    18% = (0.75 * cost of equity)

    So, the cost of equity would be = 24%

    Weighted of debt = ($25 million : $100 million) = 0.25

    And, the weighted of common stock = (Common stock : total firm)

    = $75 million : $100 million

    = 0.75
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