Brachman Builders is a large international construction firm that wants to raise up to $60 million to finance expansion. Brachman desires to maintain a capital structure that is 50% debt and 50% equity. Brachman can finance in the domestic and international markets at the rates listed in the following table. Both debt and equity would have to be sold in multiples of $15 million, and these cost figures show the component costs, each, of debt and equity if raised half by equity and half by debt.

Up to $30 million of new capital

Cost of Domesic Equity 10%

Cost of Domesic Debt 8%

Cost of European Equity 12%

Cost European Debt 6%

$31 million to $60 of new capital

Cost of Domesic Equity 16%

Cost of Domesic Debt 10%

Cost of European Equity14%

Cost European Debt 8%

What is the lowest possible average cost of capital for Brachman if the firm raises $30 million, maintains their desired capital structure and they are in a 30% tax bracket?

Answer

7.00%

8.10%

4.90%

7.10%