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Given the following information: interest rate 8% tax rate 30% dividend $ 1 price of the common stock $50 growth rate of dividends 7% debt
Given the following information:
interest rate | 8% | |
tax rate | 30% | |
dividend | $ 1 | |
price of the common stock | $50 | |
growth rate of dividends | 7% | |
debt ratio | 40% | |
a. | Determine the firm's cost of capital. |
b. | If the debt ratio rises to 50 percent and the cost of funds remains the same, what is the new cost of capital? |
c. | If the debt ratio rises to 60 percent, the interest rate rises to 9 percent, and the price of the stock falls to $30, what is the cost of capital? Why is this cost different? |
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