Determine the firm's cost of capital. b. If the debt ratio rises to 50 percent and the cost of funds remains the same, what is the new cost of capital? c. If the debt ratio rises to 60 percent, the interest rate rises to 11 percent, the price of the stock falls to $35 and the company had to issue additional securities with flotation costs of 5%, what is the cost of capital? Why is this cost different?
Determine the firm's cost of capital. b. If the debt ratio rises to 50 percent and the cost of funds remains the same, what is the new cost of capital? c. If the debt ratio rises to 60 percent, the interest rate rises to 11 percent, the price of the stock falls to $35 and the company had to issue additional securities with flotation costs of 5%, what is the cost of capital? Why is this cost different?
Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 7P
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Question
Given the following information:
Interest rate | 9% |
Tax rate | 30% |
Dividend | $2.50 |
Common stock on the market | $50 |
Growth rate | 8% |
Debt ratio | 40% |
(There is no debt amount, in response to the rejection).
a. Determine the firm's cost of capital.
b. If the debt ratio rises to 50 percent and the cost of funds remains the same, what is the new cost of capital?
c. If the debt ratio rises to 60 percent, the interest rate rises to 11 percent, the price of the stock falls to $35 and the company had to issue additional securities with flotation costs of 5%, what is the cost of capital? Why is this cost different?
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