McGraw Hill publishers has 200,000 shares of common stock outstanding with a par value of £1.00 per share. The current share price is £4 per share. The firm has outstanding debt with a par value of £0.6 million, which is selling at 75% of par. The risk-free rate of interest is 5% and the required return on the firm's debt is 10%. the risk premium on the market is 8% and the firm has an equity beta of 1.5. The corporation tax rate is 20%. Assume that debt payments are tax deductible. What is McGraw Hill's (i) cost of equity capital and (ii) WACC? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a None of the above (i) 13.6% and (ii) 13.76% (i) 17% and (ii) 11.58% (1) 13.6% and (il) 11.58% e (1) 17% and (ii) 13.76%
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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