The market value of Charter Cruise Company's equity is $15 million and the market value of its debt is $5 million. If the required rate of return on the equity is 20 percent and that on its debt is 8 percent, calculate the company's cost of capital. (Assume no taxes.)

Question

Quizplus · Accepted Answer

Weighted Average Cost of Capital (WACC) = (Equity/Total capital) * Cost of Equity + (Debt/Total capital) * Cost of Debt

Given, 
Market value of Equity = $15 million 
Market value of Debt = $5 million 
Cost of Equity = 20% 
Cost of Debt = 8%

Total capital = Equity + Debt = $15 million + $5 million = $20 million

Therefore, 
WACC = [(15/20) * 20%] + [(5/20) * 8%] = 17%

The Market Value of Charter Cruise Company's Equity Is $15