Kottinger's Kamp Supplies is considering an investment in new manufacturing equipment. The equipment costs $220,000 and will provide annual after-tax inﬂows of $50,000 at the end of each
Of the next seven years. The ﬁrm's market value debt/equity ratio is 25%, its cost of equity is 14%,
And its pre-tax cost of debt is 7%. The ﬂotation costs of debt and equity are 3% and 9%,
Respectively. The ﬁrm's combined marginal federal and provincial tax rate is 40%. Assume the
Project is of approximately the same risk as the ﬁrm's existing operations.
What is Kottinger's weighted average cost of capital?

Question

Quizplus · Accepted Answer

The Answer of Kottinger's Kamp Supplies is considering an investment in new manufacturing equipment. The equipment costs $220,000 and will provide annual after-tax inﬂows of $50,000 at the end of each
Of the next seven years. The ﬁrm's market value debt/equity ratio is 25%, its cost of equity is 14%,
And its pre-tax cost of debt is 7%. The ﬂotation costs of debt and equity are 3% and 9%,
Respectively. The ﬁrm's combined marginal federal and provincial tax rate is 40%. Assume the
Project is of approximately the same risk as the ﬁrm's existing operations.
What is Kottinger's weighted average cost of capital?

Kottinger's Kamp Supplies Is Considering an Investment in New Manufacturing