Question

you are given the following information for golden fleece financial: long-term debt outstanding: $300,000 current yield to maturity (rdebt): 8% number of shares of common stock: 10,000 price per share: $50 book value per share: $25 expected rate of return on stock (requity): 15% what is golden fleece's company cost of capital? type your answer using two decimal places. you do not need to type the % sign

Answer 1

The cost of capital for Golden Fleece Financial is 12.375%.

Step-by-step explanation:

The cost of capital for Golden Fleece Financial can be calculated using the formula:

Company Cost of Capital = (Weight of Debt * Cost of Debt) + (Weight of Equity * Cost of Equity)

Weight of Debt = Long-Term Debt Outstanding / (Long-Term Debt Outstanding + Market Value of Equity)

Weight of Equity = Market Value of Equity / (Long-Term Debt Outstanding + Market Value of Equity)

Cost of Debt = current yield to maturity (rdebt)

Cost of Equity = expected rate of return on stock (requity)

Using the given information:

1. 
   
2. Weight of Debt = $300,000 / ($300,000 + (10,000 * $50))
3. 
   
4. Weight of Equity = (10,000 * $50) / ($300,000 + (10,000 * $50))
5. 
   
6. Cost of Debt = 8%
7. 
   
8. Cost of Equity = 15%

Plugging in the values:

1. 
   
2. Weight of Debt = $300,000 / $800,000 = 0.375
3. 
   
4. Weight of Equity = $500,000 / $800,000 = 0.625

Company Cost of Capital = (0.375 * 8%) + (0.625 * 15%) = 3% + 9.375% = 12.375%