Company is financed 40% risk free debt interst 12%expected return 19% stock beta .5 what is cost of capital?
Answers:
I assume it's a Weighted Average Cost (see wikipedia link)
= (1-δ)Ke+δKd
δ = The debt to capital ratio, D / (D + E)
Ke = The cost of equity [ 19% ]
Kd = The after tax cost of debt [ 12% ]
D = The market value of the firm's debt, including bank loans and leases
E = The market value of all equity (including warrants, options, and the equity portion of convertible securities)
The problem is how to measure D & E - if we ignore the Market variability of the stock (beta .5) then it's easy - (answer 0.4) howewer they would not have specified beta unless you were expected to take it into account :-) :-)
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