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Cost of Capital - Solutions13

# Cost of Capital - Solutions13 - rS =[\$1.25 \$20 0.06 = 12.25...

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Old Exam Questions - Cost of Capital - Solutions Page 41 of 42 Pages r S = [\$1.25 / \$20] + 0.06 = 12.25% r e = [D 1 / P 0 (1 - F)] + g r e = [\$1.25 / \$20(1 - 0.125)] + 0.06 = 13.14% Amount to be Raised: Debt = (\$12,000,000)*(.40) = \$4,800,000 Retained Earnings = \$4,500,000 (Given) New Equity = (\$12,000,000)*(.60) - \$4,500,000 = \$2,700,000 Weights of Total to be Raised: Debt = \$4,800,000 / \$12,000,000 = 40% Retained Earnings = \$4,500,000 / \$12,000,000 = 37.50% New Equity = \$2,700,000 / \$12,000,000 = 22.50% Average Cost = (4.2%)*(.40) + (12.25%)*(.375) + (13.14%)*(.225) Average Cost = 1.68% + 4.59375% + 2.9565% = 9.27025% = 9.23% 54. Assume that you have collected the following information regarding your company: The company’s capital structure is 60 percent equity, 40 percent debt. The company’s forecasted capital budget for the coming year is \$15,000,000. The before-tax yield to maturity on the company’s bonds is 9 percent and the

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Cost of Capital - Solutions13 - rS =[\$1.25 \$20 0.06 = 12.25...

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