In: Finance
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%.)
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+weight*KD8(-tax rate) | |||||
=(15/20*20%)+((5/20*8%*(1-0.35))) | ||||||
16.3% | ||||||