The Delta Chemical Corporation is expected to have for the foreseeable future the following capital structure...
The Delta Chemical Corporation is expected to have for the foreseeable future the following capital structure
|
After-Tax Financing |
Total Funds |
Before Tax Cost |
Cost |
|
Debt |
30% |
|
|
Short Term |
10% |
14% |
|
Long Term |
20% |
12% |
|
Equity |
70% |
||
|
Common Stock |
30% |
The (marginal) income tax rate for Delta is expected to be 40%.
(a) Determine the cost of capital.
(b) If the risk-free rate is 6%, the average return on the S&P 500 is 12%, and b is 1.2, what is the cost of equity according to the capital asset pricing model (CAPM)?
(c) Determine the cost of capital on the basis of the cost of equity obtained in part (b).
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