I have a question regarding the Cost of capital in Part 2. I would be grateful if you could help me solve it. Thanks.
"Keller Industries currently has a capital structure consisting of 40% debts and 60% equity, which it believes is the optimal structure. The common stock produced a 12% capital gain in the recent 12-month period and paid a 5% dividend. Keller's effective income tax rate is 30%. Its debts is rated AA and the issues outstanding are as follows.
- $20 million of 70% coupon bonds with a yield to maturity of 10%.
- $20 million of 12% coupon bonds with a yield to maturity of 11%.
Keller's investment banker informed the first that long term AA rated debts are currently being issued to yield 11%. The banker also estimates that equity investors currently require a 20% pre-tax yield.
Keller's marginal cost of capital is approximately:
a. 12.8%
b. 13.1%
c. 14.7%
d. 15.1%"
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MINH LE DUC CHIEU
Other
Orient Software Development Corporation
HO CHI MINH CITY
Viet Nam
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