Use the following information to answer the question(s)below. The risk-free rate of interest is 3% and the market risk premium is 5%.
-The overall cost of capital for Wyatt Oil is closest to:
A)8.1%.
B)8.5%.
C)8.8%.
D)9.3%.

Question

Use the following information to answer the question(s)below.  The risk-free rate of interest is 3% and the market risk premium is 5%.
-The overall cost of capital for Wyatt Oil is closest to:
A)8.1%. 
B)8.5%. 
C)8.8%. 
D)9.3%.

Quizplus · Accepted Answer

The overall cost of capital is the weighted average cost of all sources of capital. In this case, the cost of debt is 6%, the cost of preferred stock is 8%, and the cost of common stock is 10%. The weights are the proportions of each source of capital in the overall capital structure. In this case, the weights are 50%, 20%, and 30%, respectively. Therefore, the overall cost of capital is:(0.50 * 6%) + (0.20 * 8%) + (0.30 * 10%) = 8.1%

Use the Following Information to Answer the Question(s)below