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Unformatted text preview: Problem 11.2 Carlton's cost of capital a. Carton's cost of equity b. Carlton's cost of debt c. Carlton's weighted average cost of capital Values used Original assumptions in Chapter in Chapter New Values 1.20 1.30 Cost of debt, before tax, kd 8.00% 7.000% Risk-free rate of interest, krf 5.00% 4.000% Corporate income tax rate, t 35.00% 30.000% General return on market portfolio, km 15.00% 9.000% Optimal capital structure: Proportion of debt, D/V 40% 50% Proportion of equity, E/V 60% 50% a) Carlton's cost of equity 17.000% 10.500% b) Carlton's cost of debt, after tax 5.200% 4.900% kd x ( 1 - t ) c) Carlton's weighted average cost of capital 12.2800% 7.7000% WACC = [ ke x E/V ] + [ ( kd x ( 1 - t ) ) x D/V ] Exhibit 11.2 showed the calculation of Carltons weighted average cost of capital. Assuming that financial conditions have worsened, and using the following current data, recalculate: Carlton's beta, ke = krf + ( km - krf ) One of the most interesting aspects of capital costs is how they have been trending downward in recent years as...
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- Spring '11