You are helping the CFO of a manufacturing company assess whether the firm should embark on...
You are helping the CFO of a manufacturing company assess whether the firm should embark on a plan to reduce its financial leverage. The firm currently has equity with a market value of $ 350 million and debt outstanding (in market value terms) of $ 700 million. The cost of equity currently is 10% and the pre-tax cost of borrowing is 8%. (The riskfree rate is 2.5% , the tax rate is 40% and the equity risk premium is 6%) A) Estimate the current cost of capital for the firm.
Homework Answers
Estimate the current cost of capital for the firm.
=(350/(350+700))*10%+(700/(350+700))*8%*(1-40%)
=6.53%
the above will be answer..
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