Cost of Capital. Marine Transport, Ltd., operates a fleet of oil and chemical tankers. A security analyst's report issued by a national brokerage firm indicates that debt yielding 13%, comprises 50% of Marine's overall capital structure. Furthermore, both earnings and dividends are expected to grow at a rate of 10% per year.
Currently, common stock in the company is priced at $40, and it should pay $2 per share in dividends during the coming year. This yield compares favorably with the 10% return currently available on risk-free securities and the 15% average for all common stocks, given the company's estimated beta of 1.
A. Calculate Marine's component cost of equity using both the capital asset pricing model and the dividend yield plus expected growth model.
B. Assuming a 50% marginal federal plus state income tax rate, calculate Marine's weighted average cost of capital.

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The Answer of Cost of Capital. Marine Transport, Ltd., operates a fleet of oil and chemical tankers. A security analyst's report issued by a national brokerage firm indicates that debt yielding 13%, comprises 50% of Marine's overall capital structure. Furthermore, both earnings and dividends are expected to grow at a rate of 10% per year.
Currently, common stock in the company is priced at $40, and it should pay $2 per share in dividends during the coming year. This yield compares favorably with the 10% return currently available on risk-free securities and the 15% average for all common stocks, given the company's estimated beta of 1.
A. Calculate Marine's component cost of equity using both the capital asset pricing model and the dividend yield plus expected growth model.
B. Assuming a 50% marginal federal plus state income tax rate, calculate Marine's weighted average cost of capital.