Suppose the cost of capital of the Blossom Company is 14 percent. If Blossom has a...
Suppose the cost of capital of the Blossom Company is 14 percent. If Blossom has a capital structure that is 50 percent debt and 50 percent equity, its before-tax cost of debt is 8 percent, and its marginal tax rate is 20 percent, then its cost of equity capital is closest to: 16.8 percent.
14.8 percent.
18.8 percent.
20.8 percent.
Homework Answers
| cost of equity capital is 21.6% i.e. closest to 20.8% | |
| Dear Student | |
| Thank you for using Chegg | |
| Please find below the answer | |
| Statementshowing Computations | |
| Paticulars | Amount |
| before-tax cost of debt | 8.00% |
| Tax rate | 20.00% |
| After tax cost of debt = 8%(1-.20) | 6.40% |
| Weight of debt = .50 | |
| Weight of Equity = .50 | |
| 14% = .50*6.40% + .50*ke | |
| 14% = 3.2% + .50ke | |
| 10.8% = .50ke | |
| ke = 21.6% | |
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