Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-term
capital: debt and equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest payments on the debt, taking into
account the fact that the interest payments are tax deductible. The cost of Golden Gate's equity capital is the investment opportunity
ate of Golden Gate's investors, that is, the rate they could earn on investments of similar risk to that of investing in Golden Gate
Construction Associates. The interest rate on Golden Gate's $85 million of long-term debt is 10 percent, and the company's combined
Federal and state income tax rates amount to 30 percent. The cost of Golden Gate's equity capital is 15 percent. Moreover, the market
alue (and book value) of Golden Gate's equity is $140 million.
Required:
Calculate Golden Gate Construction Associates' weighted average cost of capital.
Note: Round your answer to 1 decimal place. (i.e., .123 should be entered as 12.3)
Weighted average cost of capital
%
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Transcribed Image Text:Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-term capital: debt and equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest payments on the debt, taking into account the fact that the interest payments are tax deductible. The cost of Golden Gate's equity capital is the investment opportunity ate of Golden Gate's investors, that is, the rate they could earn on investments of similar risk to that of investing in Golden Gate Construction Associates. The interest rate on Golden Gate's $85 million of long-term debt is 10 percent, and the company's combined Federal and state income tax rates amount to 30 percent. The cost of Golden Gate's equity capital is 15 percent. Moreover, the market alue (and book value) of Golden Gate's equity is $140 million. Required: Calculate Golden Gate Construction Associates' weighted average cost of capital. Note: Round your answer to 1 decimal place. (i.e., .123 should be entered as 12.3) Weighted average cost of capital %
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