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Homework answers / question archive / 1) The Hudson Corporation's common stock has a beta of 1
1)
The Hudson Corporation's common stock has a beta of 1.6. If the risk-free rate is 4.7 percent and the expected return on the market is 13 percent, what is the company's cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Cost of equity capital ?
2)
Which of the following statements about the cost of capital is INCORRECT ?
Select one:
a. Weighted average cost of capital calculations should be focused on the before-tax costs.
b. The reason we must assign a cost of capital to retained earnings involves the opportunity cost principle.
c. WACC should be calculated based on the market value instead of the book value.
d. A company's target capital structure affects its weighted average cost of capital.
e. WACC should be calculated based on the marginal costs instead of the historical costs.
1)
Computation of Cost of Equity Capital:
Cost of Equity Capital = Risk-free Rate + Beta*Market Risk Premium
Here,
Market Risk Premium = Expected Return on Market - Risk-free Rate = 13% - 4.7% = 8.3%
Cost of Equity Capital = 4.7% + 1.6*8.3% = 4.7% + 13.28% = 17.98%
2) Weighted average cost of capital calculations should be focused on the after-tax costs not before-tax costs. Rest all statements are correct.
The correct option is A "Weighted average cost of capital calculations should be focused on the before-tax costs".
