Purchase Solution

Cost of Capital

Not what you're looking for?

Ask Custom Question

Week 4 - Problem 3

McCoy, Inc., has equity with a market value of $37 million and
debt with a market value of $19 million.
The cost of the debt is 7 percent semi-annually.
Treasury bills that mature in one year yield 5.5 percent per annum,
and the expected return on the market portfolio over the
next year is 13 percent.
The beta of McCoy's equity is 0.75 .The firm pays no taxes.

a. What is McCoy's debt-equity ratio?

b. What is the firm's weighted average cost of capital?

c. What is the cost of capital for an otherwise identical all-equity firm?

Purchase this Solution
Solution Summary

The solution explains how the calculate the WACC and the cost of capital for an all equity firm.

Solution Preview

1. Market Value of Debt=$19 million, Market Value of Equity=$37 million, so
Debt/Equity = 19/37=0.51

2. Because you are given an equity beta (i.e., unlevered) you have to lever it to get the proper data to compute the WACC. To lever up the beta, use the following formula:
BL = BU * (1+(1-t)(d/e)).
where BL=Beta Levered, ...

Purchase this Solution
Free BrainMass Quizzes
Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

View More Free Quizzes
Related BrainMass Solutions

  • Explain the Companies Cost of Capital and How it is Calculated

    WACC (Weighted average cost of capital), on the other hand, is the cost of all the capital. It is the total cost of capital as opposed to marginal cost of capital.

  • Calculation of cost of capital, marginal cost, WACC

    279026 Explain calculation of cost of capital, marginal cost, WACC. Impact of market risk.

  • Starbucks WACC for the attached data for years 2009, 2010.

    Marginal cost of capital takes only new funds raised while calculating the cost of capital. Cost of raising additional funds is estimated and it is multiplied with the proportional cost of capital.

  • Company's Cost of Capital

    How is the cost of capital derived?

  • Solving for unknowns

    turnover: 3 Rate on return on invested capital: 15% Cost of capital: ____% Economic profit: $320,000 Economic profit = Income - Cost of capital X invested capital 320,000 = 2,400,000 - Cost of capital X 16,000,000 Cost of capital = 13%

  • Determining required rate of return in capital budgeting

    Cost of capital (WACC)= (Cost of Equity x Proportion of equity from capital)+ (Cost of debt x Proportion of debt from capital)+ (Cost of Preference share x Proportion of preference share from capital).

  • WACC

    Cost of capital (WACC)= (Cost of Equity x Proportion of equity from capital)+ (Cost of debt x Proportion of debt from capital)+ (Cost of Preference share x Proportion of preference share from capital).

  • Marginal cost of capital & weighted average cost of capital

    Cost of capital (WACC)= (Cost of Equity x Proportion of equity from capital)+ (Cost of debt x Proportion of debt from capital)+ (Cost of Preference share x Proportion of preference share from capital).

  • cost of capital,its components

    The answer contains the reason for using opportunity cost as the cost of capital, components of cost of capital, rationale behind measuring cost of capital on after tax basis.

  • Cost of Capital - for Kraft Foods organization (KFT)

    Clearly indicate what data you used and show how you calculated the unlevered cost of capital. ---5. Why might you want to know a company's unlevered cost of capital? COST OF CAPITAL - for Kraft Foods organization (KFT) 1.

View More Related Solutions