A company is to be financed by selling $250 million in new debt and $750 million in new common stock. The before-tax required return on debt is 8% and the required return in equity is 12%. The company has ?? preferred stocks. If the company is in the 40% tax bracket,the companys marginal cost of capital
After tax cost of debt = Before tax cost (1-t)
= 8% (1-0.4)
= 4.8%
Computation of company's marginal cost of capital
Particulars |
Amount (in millions) |
Weights (A) |
Rate of return (after
tax) (B) |
Weighted Avg. cost of
capital (A)*(B) |
Debt | 250 | 0.25 | 4.80% | 1.2% |
Equity | 750 | 0.75 | 12% | 9.0% |
1,000 | 10.2% |
Hence, the company's marginal cost of capital is 10.2%.
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