Durocorp has a target capital structure of 40% debt and 60% equity. Durocorp is

Question

Durocorp has a target capital structure of 40% debt and 60% equity. Durocorp is planning to invest in a project that will necessitate raising new capital. New debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity will be provided by internally generated funds so no new outside equity will be issued. If the required rate of return on the firm's stock is 18% and its marginal tax rate is 40%, compute the firm's cost of capital. Answer 13.20% 13.68% 15.00% 9.36% Durocorp has a target capital structure of 40% debt and 60% equity. Durocorp is planning to invest in a project that will necessitate raising new capital. New debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity will be provided by internally generated funds so no new outside equity will be issued. If the required rate of return on the firm's stock is 18% and its marginal tax rate is 40%, compute the firm's cost of capital. Durocorp has a target capital structure of 40% debt and 60% equity. Durocorp is planning to invest in a project that will necessitate raising new capital. New debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity will be provided by internally generated funds so no new outside equity will be issued. If the required rate of return on the firm's stock is 18% and its marginal tax rate is 40%, compute the firm's cost of capital. 13.20% 13.68% 15.00% 9.36% 13.20% 13.68% 15.00% 9.36%

Explanation / Answer

WACC = Kd*(1-T)*Wd + KeWe

ie WACC = 10%*(1-40%)*40% + 18%*60% =13.20%

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