Lahoma Enterprises, Inc., needs $15 million to finance a major product development. The project will be financed from the following sources:

Lahoma Enterprises’ effective tax rate is 34 percent with taxes paid annually. The stock price is stable. Management determines MARR based on the weighted average cost of capital plus 8 percent (i.e., if the weight average cost of capital is 12 percent, MARR is 20 percent). Determine the appropriate value of MARR for evaluating this project.

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Bonds Source Amount Loans $2,600,000 $4,100,000 Comments 14%/yr with semiannual compounding 12% bond interest rate, quarterly premiums Stock $5,000,000 $6.50 dividend on selling price of $65/share Retained Eamings $3,300,000