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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?

Respuesta :

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/

[tex]WACC = (Wd*Rd)+(We*Re)[/tex]

Inserting these values in the equation

[tex]WACC=(0.35*7)+(0.65*13.5)\\WACC=2.45+8.77\\WACC = 11.22%[/tex]

Cost of capital is 11.22%

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