Marginal Incorporated (MI) has determined that its after-tax cost of debt is 10.0%. Its cost of preferred stock is 14.0%. Its cost of internal equity is 16.0%, and its cost of external equity is 19.0%. Currently, the firm's capital structure has $325 million of debt, $50 million of preferred stock, and $125 million of common equity. The firm's marginal tax rate is 45%. The firm is currently making projections for the next period. Its managers have determined that the firm should have $62 million available from retained earnings for investment purposes next period. What is the firm's marginal cost of capital at a total investment level of $298 million? 12.28% 11.90% 12.65% 9.73% 8.98%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
icon
Concept explainers
Question

Radubhai 

Marginal Incorporated (MI) has determined that its after-tax cost of debt is 10.0%. Its
cost of preferred stock is 14.0%. Its cost of internal equity is 16.0%, and its cost of
external equity is 19.0%. Currently, the firm's capital structure has $325 million of
debt, $50 million of preferred stock, and $125 million of common equity. The firm's
marginal tax rate is 45%. The firm is currently making projections for the next period.
Its managers have determined that the firm should have $62 million available from
retained earnings for investment purposes next period. What is the firm's marginal
cost of capital at a total investment level of $298 million?
12.28%
11.90%
12.65%
9.73%
8.98%
Transcribed Image Text:Marginal Incorporated (MI) has determined that its after-tax cost of debt is 10.0%. Its cost of preferred stock is 14.0%. Its cost of internal equity is 16.0%, and its cost of external equity is 19.0%. Currently, the firm's capital structure has $325 million of debt, $50 million of preferred stock, and $125 million of common equity. The firm's marginal tax rate is 45%. The firm is currently making projections for the next period. Its managers have determined that the firm should have $62 million available from retained earnings for investment purposes next period. What is the firm's marginal cost of capital at a total investment level of $298 million? 12.28% 11.90% 12.65% 9.73% 8.98%
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 5 steps with 5 images

Blurred answer
Knowledge Booster
Cost of Capital
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education