company is financed 40% risk free debt interst 12%expected return 19% stock beta .5 what is cost of capital?

Answer 1

I assume it's a Weighted Average Cost (see wikipedia link)

= (1-δ)Ke+δKd

δ = The debt to capital ratio, D / (D + E)
Ke = The cost of equity [ 19% ]
Kd = The after tax cost of debt [ 12% ]

D = The market value of the firm's debt, including bank loans and leases
E = The market value of all equity (including warrants, options, and the equity portion of convertible securities)


The problem is how to measure D & E - if we ignore the Market variability of the stock (beta .5) then it's easy - (answer 0.4) howewer they would not have specified beta unless you were expected to take it into account :-) :-)