Assume a forprofit skilled nursing facility chain has a targ

Assume a for-profit skilled nursing facility chain has a target capital structure that is 40 percent debt and 60 percent equity. The marginal before-tax cost of debt is 8 percent, the tax rate is 35 percent, and the marginal cost of equity is estimated to be 14 percent. What is the organization’s corporate cost of capital (rounded to the nearest tenth of a percent)?

Solution

After tax cost of debt=8*(1-tax rate)

=8(1-0.35)=5.2%

Hence organization’s corporate cost of capital=Respective costs*Respective weights

=(5.2*0.4)+(0.6*14)

which is equal to

=10.5%(Approx).