What is the company cost of capital for a firm financed with 30% debt if the debt requires a 10% return and equity requires a 16% return?

The company's cost of capital, also known as the Weighted Average Cost of Capital (WACC), is calculated by taking the weighted average of the cost of debt and the cost of equity. The formula is:

WACC = (Weight of Debt x Cost of Debt) + (Weight of Equity x Cost of Equity)

Step 1: Identify the variables Weight of Debt = 30% = 0.30 (in decimal form) Cost of Debt = 10% = 0.10 (in decimal form) Weight of Equity = 1 - Weight of Debt = 1 - 0.30 = 0.70 (since the firm is financed with 30% debt, the remaining 70% is equity) Cost of Equity = 16% = 0.16 (in decimal form)

Step 2: Substitute the variables into the formula WACC = (0.30 x 0.10) + (0.70 x 0.16)

Step 3: Calculate the WACC WACC = 0.03 + 0.112 = 0.142

So, the company's cost of capital is 0.142 or 14.2%.