Explore BrainMass
Share

cost of capital

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

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.

© BrainMass Inc. brainmass.com October 24, 2018, 9:38 pm ad1c9bdddf
https://brainmass.com/economics/finance/cost-of-capital-132744

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
See Also This Related BrainMass Solution

Market Rates and Cost of Capital

Please see attached file for tables.

What does a company's cost of capital represent and how is it calculated? How do market rates and the company's perceived market risk impact its cost of capital, and how does the company's debt to equity mix impact this cost of capital? Using the information provided, develop a spreadsheet to calculate weighted average cost (WAC) and marginal weighted average cost (MCC) of capital for Strident Marks?

You have developed the following table concerning the cost of capital sources for Strident Marks:
The future investment opportunities and the corresponding Internal Rate of Return (IRR) follow. As a result of operating its business operations profitably, Strident Marks has $1,000,000 to invest. Considering Strident Marks' weighted average cost of capital and MCC, rank the investment opportunities and indicate which ones would be accepted, which (if any) would be rejected and why.

View Full Posting Details