 

NEW!
Textbook Solutions Expert Q&A Practice 

Find solutions for your homework

home / study / business / corporate nance / corporate nance solutions manuals / principles of corporate nance + s&p market insight / 10th edition / chapter 9 / problem 14p

Principles of Corporate Finance + S&P Market Post a question

Answers from our experts for your tough
Insight (10th Edition) homework questions

See this solution in the app Enter question

Walkthrough video for this problem:

Continue to post
Chapter 9, Problem 14p
05:42 1 0 14 questions remaining

9 Bookmarks Show all steps: Snap a photo from your

Chapter 9, Problem 14P ON
phone to post a question
We'll send you a one-time
Problem download link

You are given the following information for Golden Fleece Financial:
888-888-8888 Text me
By providing your phone number, you agree to rec
a one-time automated text message with a link to
Long-term debt outstanding:  $300,000 the app. Standard messaging rates may apply.

Walkthrough
for problem
Current yield to maturity (rdebt):  8%
My Textbook Solutions
Number of shares of common stock:  10,000

Price per share: $50

Principles of Principles of Principles o

Book value per share: $25 Corporate... Corporate...
10th Edition 9th Edition 8th Edition

View all solutions

Expected rate of return on stock (requity):  15%

Calculate Golden Fleece's company cost of capital. Ignore taxes.

Step-by-step solution

Step 1 of 3

The company acquires capital from various sources such as, common stock, debentures,
preference shares etc. The proportion of the capital raised through various sources, forms the
capital structure of company. The company is required to pay the security holders, interest or
dividends as returns for the investments made. 

The cost of capital refers to the mean of the rate of return that the investors could earn on their
investments. It is called cost of capital, as the enterprise is required to pay returns to
shareholders. 

Comment

Step 2 of 3
 The formula to calculate the cost of capital is as follows:

Here,

The return on debt is

The return on equity is

The total debt is D.

The total equity of company is E.

The value of the firm, that is, total capital is V. This is the sum of debt and equity.

Comment

Step 3 of 3

Calculate GF’s cost of capital.

Here, the long-term debt outstanding is $300,000 with yield of 8%. The price per share is $50 and
number of shares are 10,000, thus, the total equity is $500,000 . The
expected return is 15%. The total value of firm is $800,000
.

Substitute the above values and obtain as follows:

Thus, the cost of capital is

Comment

Was this solution helpful? 19 0

Recommended solutions for you in Chapter 9

Chapter 9, Problem 13P Chapter 9, Problem 10P

The following table shows estimates of the risk of A project has a forecasted cash flow of $110 in
two well-known Canadian stocks: Standard year 1 and $121 in year 2. The interest rate is 5%,
Deviation, %R2BetaStandard Error... the estimated risk premium...

See solution See solution

See more problems in subjects you study

COMPANY

LEGAL & POLICIES

CHEGG PRODUCTS AND SERVICES

CHEGG NETWORK

CUSTOMER SERVICE

© 2003-2020 Chegg Inc. All rights reserved.