Measuring the Cost of Capital Messan Co.

(a U.S. firm) borrows U.S. funds at an interest rate of 10 percent per year. Its beta is 1.0. The long-term annualized risk-free rate in the United States is 6 percent. The stock market return in the United States is expected to be 16 percent annually. Messan’s target capital structure is 40 percent debt and 60 percent equity. Messan Co. is subject to a 30 percent corporate tax rate. Estimate the cost of capital to Messan Co.