Textbook Problem

Measuring the cost of Capital Messan Co., a U.S. firm, borrows U.S. funds at an interest rate of 10 percent per year. Its beta is 1.0. The longterm annualized risk-free rate in the United States is 6 percent. The stock market return in the United States is expected to be 16 percent annually. Messan’s target capital structure is 40 percent debt and 60 percent equity. The firm is subject to a 30 percent corporate tax rate (federal and state combined). Estimate the cost of capital for Messan Co.