EXAMPLE I1.7 Determining the Cost of Equity EXAMPLE I1.8 Determining the Cost of Debt Capstone Corporation needs to raise $55 million for the MicroCHP project de- scribed in Example 11.1. Capstone's target capital structure calls for a debt ratio of 0.4, indicating that $33 million has to be financed from equity. The pertinent information is as follows: For the case in Example 11.7, suppose that Capstone decided to finance the remain- ing $22 million by securing a term loan and issuing 20-year $1,000 par bonds under the following conditions: Capstone is planning to raise $33 million from the financial markets. • Capstone's beta is known to be 2.0, which is higher than 1, indicating that the firm is perceived to be riskier than the market average. • The risk-free interest rate is 5.47%, and the average market return is 13%. (These interest rates are adjusted to reflect inflation in the economy.) • The MicroCHP project is a normal risky project comparable to the firm's mar- Capstone's marginal tax rate is 40%, which is expected to remain constant in the Interest Source Amount Fraction Rate Term loan $6.6 million 0.30 12.16% per year Bonds $15.4 million 0.70 10.74% per year ket risk. future. Determine the after-tax cost of debt. Determine the cost of equity to finance the plant modernization.

Subject:- finance

The Black Bird Company plans an expansion. The expansion is to be financed by selling $21 million in new debt and $57 million in new common stock. The before-tax required rate of return on debt is 9.77% percent and the required rate of return on equity is 13.11% percent. If the company is in the 34 percent tax bracket, what is the weighted average cost of capital?

Assuming a 1-year, money market account investment at 2.51 percent (APY), a 1.1% inflation rate, a 25 percent marginal tax bracket, and a constant $40,000 balance, calculate the after-tax rate of return, the real return, and the total monetary return. What are the implications of this result for cash management decisions?

A company is considering a 10-year capital investment project. The project has annual positive cash flows each year. The accounting manager has calculated the NPV of the same project using three different costs of capital (8%, 10% and 18 %) as discount rates. Select the most logical combination of NPVS from the choices given. Note: You cannot calculate the NPVS nor do you need to. O $(5,743) $3,152 $6,612 O $(5,743) $6,612 $3,152 $3,152 $6,512 $(5,743) O $6,512 $3,152 $(5,743) O None of the above

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