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Cost of Capital Calculations

From the following data, calculate the cost of capital for operations (WACC). Use the Capital Asset Pricing Model to estimate the cost of equity capital.Please show work as this is being used as a study guide.

U.S Government long-term bond rate 4.3%
Market risk premium 5.0%
Equity beta 1.30
Per share market price $40.70
Shares outstanding 58 Million
Net financial obligations on balance sheet 1,750 Million
Weighted average borrowing cost 7.5%
Statutory tax rate 36.0%

Explain why the cost of capital for operations is different from that for equity.


Solution Preview

Market Value of Equity = 58*40.70=2360.6 million
Debt = 1750 million
Proportion of Debt in capital structure = 1750/(1750+2360.6)=0.4257
Proportion of Equity in capital structure = ...

Solution Summary

Cost of capital for operations using Capital Asset Pricing Model is estimated. The calculations uses the United States Government long-term bond rate.