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    Cost of debt and equity

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    Question - If my company has common stock with a BETA of 1.3, a rate of 4.5% and an expected return on the market of 12%, what is my cost of equity capital?

    Secondly, if my company has an outstanding debt issue with 12 years to maturity quoted at 105% of the face value and has a coupon rate of 8% annually, what is my pretax cost of debt? What is my aftertax cost if my rate goes to 35%?

    Thank you.

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    Solution Preview

    Question - If my company has common stock with a BETA of 1.3, a rate of 4.5% and an expected return on the market of 12% what is my cost of equity capital?

    Use the CAPM equation to calculate the cost of equity capital
    Cost of equity Capital = Rf + (Rm-rf)beta
    where
    Rf = risk free rate = ...

    Solution Summary

    The solution explains how to calculate the cost of debt and cost of equity.

    $2.19

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