Choice "D" is correct. The weighted-average cost of capital is computed as follows: Debt | $1,000,000/$3,000,000 × 8.0% = | 2.67% | Equity | $2,000,000/$3,000,000 × 9.0% | 6.00% | Weighted-average cost of capital | | 8.67% |
Choice "c" is incorrect. The proposed answer incorrectly suggests that the weighted-average cost of capital is the cost of debt.
Choice "a" is incorrect. The proposed answer incorrectly suggests that the weighted-average cost of capital is the simple average (8% + 9%) ÷ 2.Choice "b" is incorrect. The proposed answer incorrectly suggests that the weighted-average cost of capital is the cost of equity.
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