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cost of capital

1. You are given the following information about Shoven Gambling Company.

Long-term debt outstanding $300,000
Current yield to maturity of long-term debt 8%
Number of shares of common stock 10,000
Price per share $50
Book Value per share $25
Expected rate of return on common stock 15%

a. What is Shoven Company's cost of capital? You can ignore taxes.
b. How would the expected rate of return on equity and the cost of capital change if Shoven's stock fell to $25 due to poor profits? You can assume that the debt is still safe (no default risk) and that the business risk is unchanged.

Solution Preview

1. You are given the following information about Shoven Gambling Company.

Long-term debt outstanding $300,000
Current yield to maturity of long-term debt 8%
Number of shares of common stock 10,000
Price per share $50
Book Value per share $25
Expected rate of return on common ...

Solution Summary

The cost of capital is figured.

$2.19