The Capital structure of Matejcek and Kelloggs' Woodshop and Tea Room Emporium is provided below. Assume that US treasury bills (risk free option) have a return rate of 5% that the current market return rate is 15%, and that the company's Beta (\beta) is 1.9. The company pays taxes at a marginal rate of 40%. A) Determine the after tax cost of debt. B) Determine the cost of equity. C) Determine the after tax weighted cost of capital. Assume that instead of using Retained Earnings, the company pays that $800,000 bract to the stockholders as dividends and instead sells $800,000 worth of additional bonds to raise those funds. D) What is the new after tax weighted cost of capital?
Source
Long Term Loan (payable with annual effective interest rate=8%) at $400,000
Bonds (payable with annual effective interest rate= 10%) at $250,000
Common Stock (80,000 shares) at $600,000
Retained Earnings $800,000
Total Capital: $2,050,000