# Question

A firm has the following balance sheet items:

The before-tax interest cost on new 15-year debt would be 7.5 percent, and each $1,000 bond would net the firm $975 after issuing costs. Common shares could be sold to net the firm $8 per share, a 12 percent discount from the current market price. Current shareholders expect a 15 percent return on their investment. Preferred shares could be sold at par to provide a yield of 5 percent, with after-tax issuing and underwriting expenses amounting to 5 percent of par value. The firm’s tax rate is 45 percent, and internally generated funds are insufficient to finance anticipated new capital projects. Compute the firm’s marginal cost ofcapital.

The before-tax interest cost on new 15-year debt would be 7.5 percent, and each $1,000 bond would net the firm $975 after issuing costs. Common shares could be sold to net the firm $8 per share, a 12 percent discount from the current market price. Current shareholders expect a 15 percent return on their investment. Preferred shares could be sold at par to provide a yield of 5 percent, with after-tax issuing and underwriting expenses amounting to 5 percent of par value. The firm’s tax rate is 45 percent, and internally generated funds are insufficient to finance anticipated new capital projects. Compute the firm’s marginal cost ofcapital.

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