The shareholders and debtholders of Antiquities Corporation have invested $4 million and $12 million respectively.The debtholders charge an interest rate of 10 per cent whilst the shareholders require a return of 15 per cent.What is the company cost of capital?

Question

Quizplus · Accepted Answer

The company's cost of capital is calculated by taking the weighted average of the cost of debt and the cost of equity. The cost of debt is 10% (interest rate charged by debtholders) and the cost of equity is 15% (return required by shareholders). The total investment is $16 million ($4 million from shareholders + $12 million from debtholders). The weighted cost of capital is [(4/16)*15%] + [(12/16)*10%] = 0.25*15% + 0.75*10% = 3.75% + 7.5% = 11.25%.

The Shareholders and Debtholders of Antiquities Corporation Have Invested $4