Question

In: Finance

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

Solutions

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+weight*KD8(-tax rate)
=(15/20*20%)+((5/20*8%*(1-0.35)))
16.3%

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