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The DEF Company is planning a $64 million expansion. The expansion is to be financed by...

The DEF Company is planning a $64 million expansion. The expansion is to be financed by selling $25.6 million in new debt and $38.4 million in new common stock. The before-tax required rate of return on debt is 9 percent and the required rate of return on equity is 14 percent. If the company is in the 35 percent tax bracket, what is the firm's cost of capital?

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Answer #1

Total Capital Issued = $64 million

Value of debt issue = $25.60 million

Value of equity issue = $38.40 million.

Weight of debt = $25.60 million / 64 mllion

= 40%

Weight of equity = 60%.

Firms cost of capital is calculated below:

Cost of capital = (60% × 14%) + (40% × 9%)  × (1 - 35%)

= 8.40% + 2.34%

= 10.76%

firm's cost of capital is 10.76%.

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