IV. IwACC (8 points) Key facts and assumptions concerning Costco Company, at Dec

Question

IV. IwACC (8 points) Key facts and assumptions concerning Costco Company, at December 31, 2017, appear below. Facts and Assumptions Yield to maturity on long-term government bonds Yield to maturity on company long-term bonds Coupon rate on company long-term bonds Historical excess return on common stocks Company equity beta Stock price Number of shares outstanding (millions) Book value of equity (millions) Book value of interest-bearing debt (millions) Tax rate 3.28% 4.62% 5.50% 6.10% 0.80 $75.08 449.5 $11,585 $2.524 35.00% Use the above information to answer the following questions. a. Estimate Costco's cost of equity capital. b. Estimate Costco's weighted-average cost of capital.

Explanation / Answer

a Answer:- Calculation of cost of equity capital:-

KE= Government Borrowing rate + Equity Beta × Market Risk Premium

KE= 3.28 + 0.80(6.10) = 8.16%

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