A firm plans to raise 40 percent of its capital by debt expecting to pay an interest of 10 percent on its bonds. The rest will be financed by equity. Average return in the stock market is 10 percent, the risk-free rate is 2 percent and the beta coefficient of the firm is 1.5. If the marginal tax rate is 30 percent, what is the firm's composite cost of capital?

Question

Quizplus · Accepted Answer

The Answer of A firm plans to raise 40 percent of its capital by debt expecting to pay an interest of 10 percent on its bonds. The rest will be financed by equity. Average return in the stock market is 10 percent, the risk-free rate is 2 percent and the beta coefficient of the firm is 1.5. If the marginal tax rate is 30 percent, what is the firm's composite cost of capital?

A Firm Plans to Raise 40 Percent of Its Capital