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[solved] Chapter 11: Cost of Capital In-Class Assignment. SHOW YOUR WO


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Chapter 11: Cost of Capital In-Class Assignment.

 

SHOW YOUR WORK AND UNDERLINE YOUR ANSWER.

 

Name: __________________________

 

Droz's Hiking Gear, Inc. has found that its common equity capital shares have a beta

 

equal to 1.5 while the risk-free return is 8 % and the expected return on the market is 14 %. It has

 

7-year semiannual maturity bonds outstanding with a price of $767.03 that have a coupon rate of

 

7 %. It has preferred stock that sells for $25 and pays a dividend of $4. The firm is financed with

 

$120,000,000 of common shares (market value), $45,000,000 of preferred stock, and

 

$80,000,000 of debt. What is the after-tax cost of capital for Droz's, if it is subject to a 35 %

 

marginal tax rate? Answer Key

 

1. D Page 2

 


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