Question: Assume that a new firm will require $50,000,000 in initial capital: 40.0 percent as debt and 60.0 percent as stock. At the time of issue,

Assume that a new firm will require $50,000,000 in initial capital: 40.0 percent as debt and 60.0 percent as stock. At the time of issue, the firms before-tax cost of debt will be 6.00 percent, the firms cost of stock will be 18.00 percent, and the firms tax rate will be 40.0 percent. Also assume that all cash flows will be perpetuities, that all net income will be paid out to the stockholders as dividends (zero growth), that there will be no additional investments in current or fixed assets, and that there is no depreciation. Now assume that the firm will have NOPAT of $7,995,000 in Years 1 through infinity. Given this information, determine what the firms new cost of stock (r_S) will be after equilibrium is achieved.

Answer choices:

17.124%

16.767%

15.696%

16.410%

16.053%

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