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.

  • CreatedFebruary 25, 2015
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