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Question 11 (6 points) DMH Enterprises recently hired you to estimate their cost of capital. The firm's capital structure consists 40% debt, 10% preferred stock
Question 11 (6 points) DMH Enterprises recently hired you to estimate their cost of capital. The firm's capital structure consists 40% debt, 10% preferred stock and 50% common stock. The firm has outstanding bonds with 15 years left to maturity, par value of $1,000 and an annual coupon of 6%. The bonds currently trade for $695.76. The firm's preferred stock is currently selling for $63.64 and pays a dividend of $7. The firm does not plan on issuing new shares of common equity. It will retain earnings instead. Management has no preferred method for calculating the cost of retained earnings but they provide you with the following information: The company has a beta of 0.8. The risk-free rate is 3% and the market risk premium is 12%. Also, the company's common stock is risky enough that it commands a premium of 3% over the company's debt. If the firm faces a flat state-plus-federal tax rate of 25%, what is DMH Enterprises' cost of capital? 11.6% 10.5% 9.9% 11.3%
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