Question

The market value of Charcoal Corporation's common stock is $20 million, and the market value of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the market risk premium is 8%. If the Treasury bill rate is 5%, what is the company's cost of capital

Answer 1

The company's cost of capital will be "13%".

Step-by-step explanation:

The given values are:

Risk free rate

= 5

Beta

= 1.25

Market risk premium

= 8

Now,

⇒
`cost \ of \ common \ stock=Risk \ free \ rate+Beta* Market \ risk \ premium`

On substituting the estimated values, we get

⇒
`=5+(1.25* 8)`

⇒
`=15 \ percent`

The total value will be:

=
`20 +5`

= $
`25 \ million`

As we know,

⇒
`WACC=Respective \ costs* Respective \ weights`

⇒
`=((20)/(25)*15)+((5)/(25)* 5)`

⇒
`=12+1`

⇒
`=13 \ percent`

Note: % = percent