Byron Corporation

Byron Corporation's present capital structure, which is also its target capital structure, is 40 percent debt and 60 percent common equity. Next year's net income is projected to be $21,000, and Byron's payout ratio is 30 percent. The company's earnings and dividends are growing at a constant rate of 5 percent; the last dividend (D0) was $2.00; and the current equilibrium stock price is $21.88. Byron can raise all the debt financing it needs at 14.0 percent. If Byron issues new common stock, a 20 percent flotation cost will be incurred. The firm's marginal tax rate is 40 percent.

Refer to Byron Corporation. Assume that at one point along the marginal cost of capital schedule the component cost of equity is 18.0 percent. What is the weighted average cost of capital at that point?

a. 13.6%

b. 18.0%

c. 16.4%

d. 10.8%

e. 14.2%

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