Question

The market value of Charcoal Corporation's common stock is $20 million, and the market value of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the market risk premium is 8%. If the Treasury bill rate is 5%, what is the company's cost of capital

Answer 1

Answer:

The company's cost of capital will be "13%".

Explanation:

The given values are:

Risk free rate

= 5

Beta

= 1.25

Market risk premium

= 8

Now,

⇒  $cost \ of \ common \ stock=Risk \ free \ rate+Beta\times Market \ risk \ premium$

On substituting the estimated values, we get

⇒                                    $=5+(1.25\times 8)$

⇒                                    $=15 \ percent$

The total value will be:

=  $20 +5$

=  $$25 \ million$

As we know,

⇒  $WACC=Respective \ costs\times Respective \ weights$

⇒              $=(\frac{20}{25}\times15)+(\frac{5}{25}\times 5)$

⇒              $=12+1$

⇒              $=13 \ percent$

Note: % = percent