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Firm A's capital structure contains 20 percent debt and 80 percent equity. Firm B's capital structure contains 50 percent debt and 50 percent equity. Both firms pay 7 percent annual interest on their debt. The stock of Firm A has a beta of 1.0, and the stock on Firm B has a beta of 1.375. The risk-free rate of interest equals 4 percent and the expected return on the market portfolio equals 12 percent. The corporate tax rate for both firms is 35%.

Please find out the Weighted Average Cost of Capital for Firm A and Firm B and comment on the what causes the difference.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M941471

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