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A company is to be financed by selling $250 million in new debt and $750 million...

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

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Answer #1

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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