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A company has a $500 book value and a $600 market value. Its book value D/E ratio is 1.0 and its market value D/E ratio is 0.75. Its book value cost of debt is10% and its book value cost of equity is 22%. The market cost of debt is 12% and the market cost of equity is 28%. It is considering a $100 million expansion. It can borrow at the current cost of debt without increasing its cost of equity, but if it funds the expansion using a D/E ratio higher than its market value D/E ratio, the cost of equity will increase to 30%. Its tax rate is 40%. What is the cost of capital used to evaluate this expansion if it funds it at the market value D/E ratio?

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Financial Management, Finance

Category:- Financial Management
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