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You have been asked to review the cost of capital computation for Lemur Inc., a small retail company.

- The company currently has 80 million shares trading at $10 a share, no conventional debt and has estimated its cost of capital to be 10% (based upon a 100% equity ratio).

- However, the firm has lease commitments of $ 25 million a year for the next 5 years and $ 15 million a year for the following 3 years.

If the pre-tax cost of debt for the firm is 4% and the marginal tax rate is 40%, estimate the correct cost of capital.

(You can assume that the company’s cost of equity will remain unchanged)

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92840940

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