Your firm has a policy of never letting debt exceed 30% of total financing. It will earn $10,000,000 but distribute 40% in dividends and thus have $6,000,000 added to retained earnings. The rate of interest on debt is 10% and the firm pays 21% in income taxes. If the firm issues more than $2,400,000 in debt the interest rate will rise to 11%. What is the cost of debt currently? What is the cost of debt in excess of $2.4 million? Remember cost of capital is expressed as a % to 2 decimal places.

Answer rating: 100% (QA)

To calculate the cost of debt we can use the following formula for the weighted average cost of capi... View the full answer