Marginal Incorporated (MI) has determined that its before-tax cost of debt is 5.0% for the first $74 million in bonds it issues, and 9.0% for any bonds issued above $74 million. Its cost of preferred stock is 15.0%. Its cost of internal equity is 18.0%, and its cost of external equity is 22.0%. Currently, the firm's capital structure has $400 million of debt, $60 million of preferred stock, and $540 million of common equity. The firm's marginal tax rate is 25%. The firm's managers have determined that the firm should have $67 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 $62 million?
Marginal Incorporated (MI) has determined that its before-tax cost of debt is 5.0% for the first $74 million in bonds it issues, and 9.0% for any bonds issued above $74 million. Its cost of preferred stock is 15.0%. Its cost of internal equity is 18.0%, and its cost of external equity is 22.0%. Currently, the firm's capital structure has $400 million of debt, $60 million of preferred stock, and $540 million of common equity. The firm's marginal tax rate is 25%. The firm's managers have determined that the firm should have $67 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 $62 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 before-tax cost of debt is 5.0%
for the first $74 million in bonds it issues, and 9.0% for any bonds issued above $74
million. Its cost of preferred stock is 15.0%. Its cost of internal equity is 18.0%, and
its cost of external equity is 22.0%. Currently, the firm's capital structure has $400
million of debt, $60 million of preferred stock, and $540 million of common equity.
The firm's marginal tax rate is 25%. The firm's managers have determined that the
firm should have $67 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 $62 million?
15.48%
12.12%
14.28%
13.32%
16.38%
14.78%
12.62%
14.22%
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