Posted: March 31st, 2016

Explain how cost of capital is used in net present value 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%.

Using the information provided, calculate the company s weighted average cost of capital.

1. Explain how cost of capital is used in net present value analysis.

2. Explain how cost of capital is used in internal rate of return analysis.