Hurricane Corporation is financed with debt, preferred equity, and common equity

Question

Hurricane Corporation is financed with debt, preferred equity, and common equity with market values of $20 million, $15 million, and $30 million, respectively. The betas for the debt, preferred stock, and common stock are 0.3, 0.6, and 1.3, respectively. If the risk-free is 3.99 percent, the market risk premium is 6.05 percent, and Hurricane's average and marginal tax rates are both 30 percent. What is the company's cost of capital? 1. Costs of Debt, 2. Costs of common equity 3. costs of preferred equity (Round intermediate calculation to 4 decimal places, and final answer to 2 decimal places.)

Explanation / Answer

1. Costs of Debt= 3.99+.3(6.05-3.99)= 4.608%

After tax cost of debt= 4.608(1-.3)= 3.2256%

2. Costs of common equity = 3.99+.6(6.05-3.99)= 5.226%

3. costs of preferred equity =3.99+.1.3(6.05-3.99)= 6.668%

company's cost of capital= 20/65x3.2256+(30/65x5.226)+(15/65x6.668)= 4.94%

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.