The market value of charcoal corporation's common stock is $20 million, and the market value of its risk-free debt is $5 million. the beta of the company's common stock is 1.25, and the market risk premium is 8%. if the treasury bill rate is 5%, what is the company's cost of capital? (assume no taxes.)

The company's cost of capital is 8%

Explanation:

With the given information, we can calculate company's cost of equity by Capital Asset Pricing Model (CAPM) = risk free rate of return + beta * (market rate of return – risk free rate of return), in which risk free rate of return  is Treasur bill rate which is backed up by government then free risk

Cost of equity (CAPM) = 5% + 1.25*(8%-5%) = 8.75%

Cost of debt = interest rate of debt * (1 – tax rate) = 5%*(1-0) = 5%

Cost of capital = cost of debt * its portion in total debt & equity + cost of equital * its portion in total debt & equity

= 5%*($5 million/ $25 million)+ 8.75% * ($20 million/ $25 million) = 8%

hi : ) i found this so i hope this !

"we first find value of tax in dollars.

the difference between the two prices   is: 23. 54 - 22 = 1.54

therefore the sales tax in dollars is 1.54

the tax % will be   (amount of tax / original cost price ) × 100

(1.54 / 22) × 100  → (0.07) × 100 =   7

so the tax rate is 7%

we can double check the answer.

7 % of 22   → (7/100) × 22 → 0.07 × 22 = 1.54

22 + 1.54 = 23.54"