Sam’s Orthodontic Services (SOS) will retain for reinvestment $300,000 of the net income it expects to generate next year. Recently, the CFO determined that the firm’s after-tax cost of debt, rdT, is 5 percent; its cost of internal equity (retained earnings), rs, is 10 percent; and its cost of external equity (new common stock), re, is 13 percent. Next year, SOS expects to finance investment projects so as to maintain its current capital structure, which consists of 60 percent debt. SOS has no preferred stock. What will SOS’s marginal cost of capital be if its total investment needs are $700,000 for next year?
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