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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