Assume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow ifa. 100 percent debt is used?b. 100 percent common stock?(assume that the stockholders will accept 0.08)

Cost of Capital is the rate that a company is expected to pay on average on all the security holders…

Answered: Assume that a company borrows at a cost…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 2P

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Assume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if a. 100 percent debt is used? b. 100 percent common stock? (assume that the stockholders will accept 0.08)