Question

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%

Calculate the company's cost of capital. Ignore taxes.

Answer 1

Cost of capital=11.18%

Step-by-step explanation:

First We will calculate the Equity of firm:

Equity= Number of share* Book value per share

Equity= 10,000* $25

Equity= $250,000

Long-term debt=$300,000

Expected rate of return=15%=0.15

Current yield to maturity (rdebt)=8%=0.08.

Value of firm=Equity+Long-term debt

Value of firm= $250,000+$300,000

Value of firm= $550,000

Formula:

`Cost\ of \ Capital=(Equity)/(Value\ of\ firm)* Rate\ of\ return+(Debit)/(Value\ of\ firm)* yield\ to\ maturity`

`Cost\ of\ Capital=(\$250,000)/(\$550,000)*0.15+(\$300,000)/(\$550,000)*0.08\\ Cost\ of\ Capital=0.1118`

Cost of capital=11.18%