Weighted average cost of capital
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A firm plan's to raise $4 million by borrowing at an interest rate of .16 and to raise $1 million by issuing common stock. The firm's stock has a beta coefficient of 2, the risk free interest rate is .06, the average rate of return on stocks is .09 , the marginal tax rate is 25%. What is the composite cost of capital?
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Solution Summary
Weighted average cost of capital is determined.
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Cost of Debt = Interest rate *(1-Tax rate) = 0.16*(1-0.25)=0.12 or 12%
Cost of equity = Risk free ...
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