Question

You are given the following information for Golden Fleece Financial: Long-term debt outstanding: Current yield to maturity (rdebt): $330,000 7% Number of shares of common stock: Price per share: Book value per share: Expected rate of return on stock (reguity): 11,500 $ 50.30 28 14% Calculate Golden Fleece's company cost of capital. Ignore taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) % Cost of capital

Answer 1

The company cost of capital is calculated as the weighted average of the cost of debt and the cost of equity. The weights are determined by the proportion of debt and equity in the company’s capital structure.

First, we need to calculate the market value of Golden Fleece’s debt and equity. The market value of debt is equal to the book value since the yield to maturity is given, which is $330,000. The market value of equity is equal to the number of shares outstanding multiplied by the price per share, which is 11,500 * $50.30 = $578,450.

Next, we need to calculate the weights for debt and equity. The weight for debt is calculated as the market value of debt divided by the sum of the market values of debt and equity, which is 330,000 / (330,000 + 578,450) = 0.3634. The weight for equity is calculated as the market value of equity divided by the sum of the market values of debt and equity, which is 578,450 / (330,000 + 578,450) = 0.6366.

Finally, we can calculate Golden Fleece’s company cost of capital as the weighted average of the cost of debt and the cost of equity: (0.3634 * 7%) + (0.6366 * 14%) = 11.09%.

Therefore, Golden Fleece’s company cost of capital is 11.09%.