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Computing The Weighted-Average Cost of Capital Using CAPM

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A firm has an equity beta of 1.16 and a debt to equity ratio of 3/1, with an expected market portfolio of 10%. The interest rate on government bonds is 5% and the firm can borrow long term at a rate of 6% and the corporate tax rate is 40%. What is the cost of capital? What is the cost of equity?

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Solution Summary

This solution illustrates how to compute the weighted-average cost of capital using the Capital Asset Pricing Model.

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The cost of equity is computed thusly: Cost of equity=Risk-free rate+((Market Portfolio cost minus risk fee rate)*Beta)
Thus, the firm's cost of equity is ...

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