Question

Please show all work in order to get credit on an excel file. If you provide only the answers without showing your work, I will not be able to provide any credit if your answer is wrong.

A company is planning a 50 mio expansion. The expansion is to be financed by selling 20 mio in new debt and 30 mio in new common stock. The equity investors are expecting a 14% return. Before-tax required return on debt is 9%. If the company is in the 40% tax bracket, the company’s marginal cost of capital is:

Answer #1

Using Excel to Calculate

A | B | ||||||

1 | Debt | 20 | million | ||||

2 | Equity | 30 | million | ||||

3 | Cost of Debt | 9.00% | |||||

4 | Cost of Equity | 14% | |||||

5 | Tax Rate | 40.00% | |||||

Cost of Capital | 10.56% | (Excel Formula=B2/(B1+B2)*B4+B1/(B1+B2)*B3*(1-B5) |

Alternative Method

Cost of Capital =Equity/(Equity+Debt)*Cost fo
equity+Debt/(Equity+Debt)*Cost of Debt*(1-Tax Rate)

=30/(30+20)*14%+20/(30+20)*9%*(1-40%) = 10.56%

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