Four years ago, Velvet Purses purchased a mailing machine at a cost of $176,000. This equipment is currently valued at $64,500 o
1 answer:
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Answer:
so cost of capital = 9.9 %
correct option is a 9.9%
Explanation:
given data
capital structure = 40%
common equity = 60%
tax rate = 34%
pretax cost = 8.5%
pretax cost = 10%
market price = $59
Flotation costs = $3 per share
common stock dividend = $3.15
Dividends expected to grow = 7%
to find out
cost of capital if the firm uses bank loans and retained earnings
solution
cost of retained earning = + growth rate ........................1
cost of retained earning = + 0.07
cost of retained earning =0.1271271186
and
cost of capital will be
cost of capital = weight for debit × ( cost of debit × ( 1 - tax rate ) ) + weight for common stock × cost of common stock
cost of capital = 0.40 × ( 8.5% × ( 1 - 0.34 ) ) + 0.60 × 0.1271271186
cost of capital = 0.0987
so cost of capital = 9.9 %
correct option is a 9.9%