A company is planning a $80 million expansion. The expansion is to be financed by selling...
A company is planning a $80 million expansion. The expansion is to be financed by selling $30 million in new debt and $50 million in new common stock. The before-tax required rate of return on debt is 8 percent and the required rate of return on equity is 16 percent. If the company is in the 40 percent tax bracket, what is the firm's cost of capital??
Homework Answers
After tax cost of debt=8(1-0.4)=4.8%
Hence firm's cost of capital=(Respective costs*Respective investment weights)
=(30/80*0.048)+(50/80*0.16)
=11.8%
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