Assume the risk$-$free interest rate is $5\%$ and the average return on the market index is $9\%.$ A firm has assets worth $10,000$ and debt liability worth $4,000.$ The beta of the firm's assets is $1\mathrm{.}2,$ and the debt costs $7\%.$

a$.$ What is the weighted average cost of capital for the firm?

$(10$ marks$)$

b$.$ What is the cost of the equity capital of the firm?

$(10$ marks$)$

c$.$ If the firm increases its borrowing to a debt$-$equity ratio of one, what is the cost of equity capital now? Assume that the cost of debt remains at $7\%$ after restructuring the firm's balance sheet.

Answer rating: 100% (QA)

a To calculate the weighted average cost of capital WACC for the firm we can use the following formu... View the full answer