An investment banking firm has estimated the following after-tax cost of debt and cost of equity for Red Deer Luxury Mountain Travel Tours.

$\begin{array}{ccc}
\text { Proportion of Debt} & \text { After-tax Cost of Debt }& \text { Cost of Equity }\
\hline 30 \% &3.5 \% &10.5\% \
40 \% & 3.8\% & 11.3\% \
50 \% & 5.0 \% & 12.9\% \
60\%&7.2\%&14.5\%
\end{array}$
What is the cost of capital for Red Deer's optimal capital structure given the above information?

Question

An investment banking firm has estimated the following after-tax cost of debt and cost of equity for Red Deer Luxury Mountain Travel Tours.

$\begin{array}{ccc}
  \text {  Proportion of Debt} &  \text {  After-tax Cost of Debt }&  \text {  Cost of Equity }\
\hline  30 \%  &3.5 \% &10.5\% \
 40 \% & 3.8\% &  11.3\%  \
50 \%  & 5.0 \%  &  12.9\%  \
60\%&7.2\%&14.5\%
\end{array}$
 What is the cost of capital for Red Deer's optimal capital structure given the above information?

Quizplus · Accepted Answer

The Answer is C

An Investment Banking Firm Has Estimated the Following After-Tax Cost