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Long-term debt $700 million Preferred stock 10 million shares at $42 per share Common stock 30...

Long-term debt $700 million Preferred stock 10 million shares at $42 per share Common stock 30 million shares at $109 per share

Costs of debt and equity are as follow: Before-tax cost of debt 7% Cost of preferred stock 9% Cost of equity 14% Tax rate 20% What is cost of capital for FCX? Cost of capital = __________%

Solutions

Expert Solution

Compute the after-tax cost of debt, using the equation as shown below:

After-tax cost of debt = Cost of debt before tax*(1 – Tax rate)

                                   = 7%*(1 – 0.20)

                                   = 5.60%

Hence, the after-tax cost of debt is 5.60%.

Compute the preference capital, using the equation as shown below:

Preference capital = Shares outstanding*Share price

                              = 10 million*$42

                              = $420 million

Hence, the preference capital is $420 million.

Compute the common stock capital, using the equation as shown below:

Common stock = Shares outstanding*Share price

                         = 30 million*$109

                         = $3,270 million

Hence, the common stock capital is $3,270 million.

Compute the cost of capital, using MS-excel as shown below:

The result of the above excel table is as follows:

Hence, the cost of capital is 12.1822%.

jeff jeffy answered 1 year ago
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