A firm has the following: $100,000 bank loan with an effective interest rate of

Question

A firm has the following: $100,000 bank loan with an effective interest rate of 12%;   $500,000, 10%, 20year bonds selling at 90% of face $200,000, 15%, $20 noncumulative, noncallable preferred stock with a total market value of $300,000; (equity money) 10,000 shares of $1 par common stock. The estimated required rate of return on the common stock is 20%. (equity money The firm is subject to a 40% tax rate. a. Assume that the firm has decided to finance the next project using debt. Does this mean that next year investment projects should use have a 1% cost of capital/discount rate?

Explanation / Answer

No. The investment project would have the discount rate that is applicable on the debt used to finance the project

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.