Cost of Capital

question 39

Essay

Cost of Capital. Chock Full O'Coffee, Inc., processes and markets a leading brand of coffee. A security analyst's report issued by a national brokerage firm indicates that debt yielding 9%, comprises 60% of the company's overall capital structure. Furthermore, both earnings and dividends are expected to grow at a rate of 4% per year.
Currently, common stock in the company is priced at $20, and it should pay $1.40 per share in dividends during the coming year. This yield compares favorably with the 8% return currently available on risk-free securities and the 14% average for all common stocks, given the company's estimated beta of 0.5.
A. Calculate the component cost of equity using both the capital asset pricing model and the dividend yield plus expected growth model.
B. Assuming a 50% marginal federal plus state income tax rate, calculate the company's weighted average cost of capital.

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