Nessumsar company develops educational materials. It has a pre-tax cost of debt of 8.0% and a cost of equity of 11.0%. It has a marginal tax rate of 40%, $50 million of debt and $100 million of equity.

a. Calculate the company's overall cost of capital.

Cost of Debt:

Pre-tax Cost of Debt

Tax Rate

After-tax Cost of Debt

Cost of Equity:

Cost of Equity

Weights:

Dollar Value ($ in millions)

% Amount

Debt

Equity

Total

$ -

0.0%

Cost of Capital:

Formula:

Calculation:

b. What happens to the cost of equity as more debt gets used relative to equity? Why does this occur?