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Cost of Capital

Company A has $2 million of outstanding debt and 100,000 outstanding shares of stock selling at $30 per share. The book value of the stock is $10 per share. There is no preferred stock. Its current borrowing rate is 8%. Company A will be paying a dividend of $3 per share and is expected to grow at annual rate of 5%. Find the weighted average cost of capital: a) assuming no taxes and b) assuming a 25% corporate tax rate.

a. Find the weighted average cost of capital assuming there is no debt.

b. Assume the overall corporate tax rate is 25%. Find the weighted average cost of capital.

Solution Preview

Company A has $2 million of outstanding debt and 100,000 outstanding shares of stock selling at $30 per share. The book value of the stock is $10 per share. There is no preferred stock. Its current borrowing rate is 8%. Company A will be paying a dividend of $3 per share and is expected to grow at annual rate of 5%. Find the weighted average cost of capital: a) assuming no taxes and b) assuming a 25% corporate tax rate. ...

Solution Summary

This solution is comprised of a detailed explanation to find the weighted average cost of capital.

$2.19