CDE Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity. CDE is in the 40% tax bracket. The company can issue up to $20,000,000 in new bonds at par with a 7% coupon rate; any subsequent amount must carry a 2% premium to compensate investors for added risk. A new issue of preferred stock would pay an annual dividend of $4.00 and be priced to net the company $50.00 per share after the $3.00 per share floatation cost. The firm has $21,000,000 in change in retained earnings for the current period. CDE's common stock trades at $40.00 per share and the expected dividend on the common stock at t1 is 2.00. Floatation costs on a new common stock issue is $5.00 per share. The company is growing at 7% per year. If the firm has a capital budget of $55m, what is its marginal cost of capital?

• A. 11.80%
• B. 10.75%
• C. 9.31%
• D. 8.83%

If the firm has a capital budget of $45m, what is its marginal cost of capital?

• A. 8.48%
• B. 8.83%
• C. 9.60%
• D. 9.78%