An engineering firm has borrowed $1.0M at 6%. The stockholders have invested another $1.5M. The firm’s retained earnings total $1.2M. The return on equity is estimated to be 12%. What is the firm’s cost of capital: (a) Before taxes? (b) After taxes with a tax rate of 28%?

An engineering firm has borrowed $1.0M at 6%. The stockholders have invested another $1.5M. The firm’s retained earnings total $1.2M. The return on equity is estimated to be 12%. What is the firm’s cost of capital: (a) Before taxes? (b) After taxes with a tax rate of 28%?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 7P

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Definition Definition Remaining net income of the company after the required dividends are paid to shareholders. This surplus money is usually invested back into the business to expand its business operations or launch a new product.

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