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Marginal Cost of Capital for a 40% Tax Bracket

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The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equity is 14%. If the company is in the 40% tax bracket, what is the marginal cost of capital?
a. 14.0%
b. 9.0%
c. 10.6%
d. 11.5%

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Solution Summary

The solution determines the marginal cost of capital is a company is in the 40% tax bracket.

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The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate ...

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