The market value of Cable Company's equity is $60 million and the market value of its debt is $40 million.If the required rate of return on the equity is 15% and that on its debt is 5%,calculate the company's cost of capital.(Assume no taxes.)

Question

Quizplus · Accepted Answer

The cost of capital is the weighted average of the cost of equity and the cost of debt.

Weight of equity = $60 million / ($60 million + $40 million) = 0.6 
Weight of debt = $40 million / ($60 million + $40 million) = 0.4

Cost of equity = 15% 
Cost of debt = 5%

Cost of capital = (0.6 x 15%) + (0.4 x 5%) = 9% + 2% = 11%

Therefore, the answer is C) 11%.

The Market Value of Cable Company's Equity Is $60 Million