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A firm plans to raise $4 million by borrowing at an interest rate of 16% and to raise $1

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The Question

A firm plans to raise $4 million by borrowing at an interest rate of 16% and to raise $1

million by issuing common stock. The firm's stock has a beta coefficient of 2, the risk free

interest rate is 6%, the average rate of return on stocks is 9%, and the marginal tax rate is

25%. What is the firm's composite cost of capital? Please provide explanation to the answer.

 

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Oct 14, 2020

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