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Golden Gate Construction Associates, a real estate developer and building contractor in the San Francisco, consist of two sources of long-term capital: debt and equity. The cost to Golden Gate of issuing debt is after-tax cost of the interest payments on the debt, taking to account the fact which the interest payments are tax deductible. The cost of Golden Gate's equity capital is the investment opportunity rate of Golden Gate's investors, which is, the rate they could earn on investments of similar risk to that of investing in Golden Gate Construction Associates. The interest rate on Golden Gate's $60 million of long-term debt is 10%, and the company's tax rate is 40%. The cost of Golden Gate's equity capital is 15%. Furthermore, the market value (and book value) of Golden Gate's equity is $90 million.

Compute the Golden Gate Construction Associate's weighted-average cost of capital.

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  • Category:- Accounting Basics
  • Reference No.:- M919154

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