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You are analyzing the cost of capital for a firm that is financed with 65 percent equity and 35 percent debt. The cost of debt capital is 8 percent, while the cost of equity capital is 20 percent for the firm. What is the overall cost of capital for the firm? Select one: O a. 12.2% b. 15.8 % c. None of these O d. 20.2%

Answer :

15.8 % will be the overall cost of capital for the firm at 8% debt capital and 20% equity capital.

Weight of equity = 65%

Cost of Capital of equity = 20%

overall cost of equity = Weight of equity x Cost of Capital of equity

                                   =  65% x 20%

                                   = 13%

Weight of debt= 35%

Cost of Capital of debt = 8%

overall cost of debt = Weight of debt x Cost of Capital of debt

                                 = 35% x 8%

                                 = 2.80%

overall cost of capital for the firm = overall cost of equity + overall cost of  

                                                                                                    debt

                                                        = 13% + 2.80%

                                                        = 15.8%

the overall cost of capital for the firm is 15.8%

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