The market value of Charter Cruise Company's equity is $15 million and the market value of...

The market value of Charter Cruise Company's equity is $15 million and the market value of its debt is $5 million. If the required rate of return on the equity is 20 percent and that on its debt is 8 percent, calculate the company's cost of capital. (Assume tax rate is 35%.)

A. 16.3 percent
B. 14.7 percent
C. 17 percent
D. 20.5 percent

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Expert Solution

The answer is A

Market Value of Equity	$ 15 million
Market Value of Debt	$ 5 million

Total Market Value		$ 20 million

Rate of return on equity ke	20%
Rate of return of debt kd	8%
Tax rate			35%


Company Cost of capital	=weight ke+weightKD8(-tax rate)
			=(15/2020%)+((5/208%*(1-0.35)))
			16.3%

jeff jeffy answered 2 years ago

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