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%