Marginal Incorporated (MI) has determined that its after-tax cost of debt is 9.0%. Its cost of preferred stock is 15.0%. Its cost of internal equity is 17.0%, and its cost of external equity is 19.0%. Currently, the firm's capital structure has $378 million of debt, $63 million of preferred stock, and $459 million of common equity. The firm's marginal tax rate is 45%. The firm is currently making projections for next period. Its managers have determined that the firm should have $92 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 $157 million? a. 14.01% b. 14.52% c. 11.80% d. 13.50% e. 12.82%
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Marginal Incorporated (MI) has determined that its after-tax cost of debt is 9.0%. Its cost of
is 15.0%. Its
capital structure has $378 million of debt, $63 million of preferred stock, and $459 million of common equity.
The firm's marginal tax rate is 45%. The firm is currently making projections for next period. Its managers
have determined that the firm should have $92 million available from
next period. What is the firm's marginal cost of capital at a total investment level of $157 million?
14.01%
14.52%
11.80%
13.50%
12.82%
Trending now
This is a popular solution!
Step by step
Solved in 5 steps
