The Edmonton Eskimos Football Club has estimated the following cost of debt (before-tax) and cost of equity for its food and beverage operations.

$\begin{array}{ccc}
\text { Proportion of Debt} & \text { After-tax Cost of Debt }& \text { Cost of Equity }\
\hline 30 \% &9.5 \% &14.4\% \
40 \% & 9.7\% & 15.2\% \
50 \% & 10.1 \% & 16.2\% \
60\%&11.8\%&18.5\%
\end{array}$
What is the cost of capital for the Edmonton Eskimos' optimal capital structure given the above information and a 40% effective tax rate?

Question

The Edmonton Eskimos Football Club has estimated the following cost of debt (before-tax) and cost of equity for its food and beverage operations.

$\begin{array}{ccc}
  \text {  Proportion of Debt} &  \text {  After-tax Cost of Debt }&  \text {  Cost of Equity }\
\hline  30 \%  &9.5 \% &14.4\% \
 40 \% & 9.7\% &  15.2\%  \
50 \%  & 10.1 \%  &  16.2\%  \
60\%&11.8\%&18.5\%
\end{array}$
What is the cost of capital for the Edmonton Eskimos' optimal capital structure given the above information and a 40% effective tax rate?

Quizplus · Accepted Answer

The cost of capital is calculated using the weighted average cost of capital (WACC) formula. For the 50% debt proportion, the after-tax cost of debt is 10.1% * (1 - 0.4) = 6.06%. The WACC is then (0.5 * 6.06%) + (0.5 * 16.2%) = 11.13%.

The Edmonton Eskimos Football Club Has Estimated the Following Cost