Question:
The weighted average cost of capital which is 9.48%. Explain how the cost of capital is used in net present value analysis. Explain how cost of capital is used in internal rate of return analysis.
Assume that 40% of Company A's capital structure is in the form of bonds and other debt. Total common stockholder equity provides 50% of the capital, and preferred stock provides 10%. The company has determined that the after-tax cost of its bonds and other debt is 6.2%. The cost of preferred stock is 8%, and the cost of common stock and retained earnings is 12.4%.