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Category > Business & Finance Posted 20 Jun 2017 My Price 11.00

The Classic Car co. has a before-tax cost of debt capital

The Classic Car co. has a before-tax cost of debt capital of 9%, a cost of preferred stock of 10%, a cost of equity capital of 14%, and a marginal tax rate of 40%. The market values of its debt, preferred stock and common stock are $40 million, $20 million, and $60 million respectively. Therefore, for evaluating average risk projects, the manager should use a discount rate of

 

  • Firm should use discount rate of 10.47%        
               
    Division Value Weight(a) Return(b) Weighted Return (a*b) Working Notes
    Equity or common stock 60,000,000.00 0.50 14.00% 7.00%  
    Preffered Stock 20,000,000.00 0.17 10.00% 1.67%  
    Debt 40,000,000.00 0.33 5.40% 1.80% Kd = 9%(1-.40) = 5.4%
      120,000,000.00 1.00 15.40% 10.47%

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Status NEW Posted 20 Jun 2017 06:06 AM My Price 11.00

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