Answer (A) is correct . The 7% debt cost and the 12% equity cost should be weighted by the proportions of the total investment represented by each source of capital. The total project costs $50 million, of which debt is $15 million, or 30% of the total. Equity capital is the other 70%. Consequently, the weighted-average cost of capital is 10.5% [(30% ¡Á 7%) + (70% ¡Á 12%)].
Answer (B) is incorrect because This percentage reverses the weights.
Answer (C) is incorrect because This percentage assumes debt and equity are equally weighted.
Answer (D) is incorrect because This percentage assumes that 7% is the before-tax cost of debt and that equity is tax deductible.
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ted-average cost of capital to DQZ.
