Problem:

Hastings Corporation is interested in acquiring Vandell Corporation. Vandell currently has a cost of equity of 10%; 25% of its financing is in the form of 6% debt, and the rest is in common equity. Its federal-plus-state tax rate is 37%. After the acquisition, Hastings expects Vandell to have the following FCFs and interest payments for the next three years (in millions): Year1 Year 2 Year 3 FCF $10 $20 $25 Interest expense 28 24 20.28 After this, the free cash flows are expected to grow at a constant rate of 5%, and the capital structure will stabilize at 45% debt with an interest rate of 6.9%.

Required:

Question: What is the percentage cost of capital for the post-horizon period?

Note: Provide support for your rationale.