An investment banking firm has estimated the following after-tax cost of debt and cost of equity for Odarti's Finest Vegas Resorts.
What is the cost of capital at Odarti's optimal capital structure given the above information?
A)11.70%
B)11.54%
C)11.75%
D)11.65%

Question

An investment banking firm has estimated the following after-tax cost of debt and cost of equity for Odarti's Finest Vegas Resorts. 
What is the cost of capital at Odarti's optimal capital structure given the above information?
A)11.70% 
B)11.54% 
C)11.75% 
D)11.65%

Quizplus · Accepted Answer

The cost of capital at Optimal Capital structure is calculated using the weighted average of cost of debt and cost of equity. Assuming equal weightage, the calculation would be:
Cost of capital = (0.5 x 0.11) + (0.5 x 0.118) = 0.114 or 11.54%.
Therefore, the best choice based on the given information is B.

An Investment Banking Firm Has Estimated the Following After-Tax Cost