Question
Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-term capital: debt and equity. The cost
Golden Gate Construction Associates, a real estate developer and building contractor in San Francisco, has two sources of long-term capital: debt and equity. The cost to Golden Gate of issuing debt is the after-tax cost of the interest payments on the debt, taking into account the fact that the interest payments are tax-deductible. The cost of Golden Gates equity capital is the investment opportunity rate of Golden Gates investors, that 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 Gates $60 million of long-term debt is 10 percent, and the companys combined federal and state income tax rates amount to 30 percent. The cost of Golden Gates equity capital is 15 percent. Moreover, the market value (and book value) of Golden Gates equity is $90 million. Required: Calculate Golden Gate Construction Associates weighted-average cost of capital.
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