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Question 3 (6 points) Efficient Firm recently hired you to estimate its cost of capital. The firm has a target capital structure that consists of
Question 3 (6 points) Efficient Firm recently hired you to estimate its cost of capital. The firm has a target capital structure that consists of 50% debt and 50% common equity but no preferred stock. The firm has outstanding bonds with a current price of $926.40, 10 years to maturity and a 5% coupon. The firm is subject to a 40% tax rate. The firm does not plan to issue new common equity, it will retain earnings instead. Management provides you the following information about their common stock: Efficient Firm is a mature firm expected to grow at a constant rate of 4% forever. The firm is expected to pay a dividend of $3 at year end and its common stock trades at a price of $35.72 per share. What is the firm's cost of capital
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