Marginal Incorporated (MI) has determined that its after-tax cost of debt is 5.0% for the first $62 million in bonds it issues, and 7.0% for any bonds issued above $62 million. Its cost of preferred stock is 12.0%. Its cost of internal equity is 15.0%, and its cost of external equity is 19.0%. Currently, the firm's capital structure has $325 million of debt, $70 million of preferred stock, and $105 million of common equity. The firm's marginal tax rate is 45%. The firm's managers have determined that the firm should have $50 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 $167 million?
Marginal Incorporated (MI) has determined that its after-tax cost of debt is 5.0% for the first $62 million in bonds it issues, and 7.0% for any bonds issued above $62 million. Its cost of preferred stock is 12.0%. Its cost of internal equity is 15.0%, and its cost of external equity is 19.0%. Currently, the firm's capital structure has $325 million of debt, $70 million of preferred stock, and $105 million of common equity. The firm's marginal tax rate is 45%. The firm's managers have determined that the firm should have $50 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 $167 million?
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
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Transcribed Image Text:Marginal Incorporated (MI) has determined that its after-tax cost of debt is 5.0% for
the first $62 million in bonds it issues, and 7.0% for any bonds issued above $62
million. Its cost of preferred stock is 12.0%. Its cost of internal equity is 15.0%, and
its cost of external equity is 19.0%. Currently, the firm's capital structure has $325
million of debt, $70 million of preferred stock, and $105 million of common equity.
The firm's marginal tax rate is 45%. The firm's managers have determined that the
firm should have $50 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 $167 million?
8.08%
10.22%
9.38%
8.92%
8.17%
7.33%
6.62%
7.46%
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