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    Luxury Porcelain Company-Weighted Average Cost of capital

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    Calculate the weighted average cost of capital for the Luxury Porcelain Company. The book value of Luxury's outstanding debt is $60 million. Currently the debt is trading at 120% of book value and is priced to yield 12%. The 5 million outstanding shares of Luxury stock are trading at $20 per share. The required return on Luxury stock is 18%. The tax rate is 25%.

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    Solution Preview

    See the attached file.

    Market value of debt= 72 million =120%*60
    Market value of equity= 100 million =5*20

    Step 1: Calculate the after tax cost of ...

    Solution Summary

    The solution calculates the Weighted Average Cost of capital by first calculating the after tax cost of debt.

    $2.19