Problem 6 – St. Vincent’s Hospital has a target capital structure of 35 percent debt and 65 percent equity. Its cost of equity (fund capital

Question

Problem 6 – St. Vincent’s Hospital has a target capital structure of 35 percent debt and 65 percent equity. Its cost of equity (fund capital) estimate is 13.5 percent and its cost of tax-exempt debt estimate is 7 percent. What is the hospital’s corporate cost of capital?

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Eden 2 weeks 2022-01-07T17:03:07+00:00 1 Answer 0 views 0

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    2022-01-07T17:04:25+00:00

    Answer:

    Cost of capital is 11.22%

    Step-by-step explanation:

    Given Data:

    Wd = weight of debt = 0.35

    We = weight of equity = 0.65

    Rd = after-tax cost of debt = 7% (tax-exempt debt)

    Re = cost of equity = 13.5%

    Required:

    WACC = weighted average of cost of capital = ?

    Solution:

    As we know that the WACC is represented by the following equation/

    WACC = (Wd*Rd)+(We*Re)

    Inserting these values in the equation

    WACC=(0.35*7)+(0.65*13.5)\\WACC=2.45+8.77\\WACC = 11.22%

    Cost of capital is 11.22%

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45:7+7-4:2-5:5*4+35:2 =? ( )