Share
Explore BrainMass

Jack's Construction Co: Weighted Cost of Capital

Question: Jack's Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4% and the market risk premium is 8%. Jack's tax rate is 35%. What is Jack's weighted average cost of capital?
- 7.10 %
- 7.39 %
- 10.38 %
- 10.65 %
- 11.37 %

Solution Preview

Answer: 10.38%
Ks = risk-free rate + beta(market risk premium)
Ks = 4% + 1.1(8%) = 12.80%
Market Value Weight

Bonds, $1000 par, ...

$2.19