Blammo, Inc has a target capital structure of 30% debt and 70% equity. The firm is planning to
invest in a project that will necessitate raising new capital. New debt will be issued at a before-tax
yield of 14%, 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 22% and
its marginal tax rate is 35%, compute the firm's cost of capital.
A) 18.13% B) 19.68% C) 18.00% D) 15.55%
A
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