[mjbey1s]

A company is trying to determine the cost of capital for a major expansion project. A survey of commercial lenders indicates that cost of debt is currently 8% based on the company’s debt ratio of 40%. The company complies with this requirement and has determined that a stock issuance would require a 10% return in order to attract investors. Which of the following is the company’s cost of capital?

They say the answer is 9.2%…………Can someone please explain???!!!

[mjbey1s]

I also have one more I cannot figure out. These are from the recently released AICPA questions.

A company wants to approximate the 12% annual interest rate based on a 365-day year it pays on its working capital loan. Which of the following terms should the company offer its customers?

A) 2%, 15, net 45
B) 1%, 15, net 45
C) 0.75%, 10, net 30
D) 0.50%, 10, net 30

They say the answer is B……does anyone know why?!

[Anonymous]

Cost of debt = .40 x .08 = .032
Cost of equity = .60 x .10 = .060

.032 + .060 = .092 (i.e. 9.2%)

Note: debt + equity must equal 100%. So 40% debt = 60% equity
Note 2: if there would have been a tax rate, it would have to be used on the cost of debt.

[mjbey1s]

Thank you so much!

[ainamor2003]

Since I only registered today…maybe it's late for the answer on your post “May 26, 2016 at 1:27 pm”…it's testing for “what payable terms should you be looking to achieve the 12%”…or, the concept of not taking the discount (many MCQs were phrased in that direction)
the math…(1/99)*(365/30)= 12.1666% , where 1 is 1% given, 99(100-1), 30 is [“net45” minus “15” the term for which the discount of 1% was offered]

[Author]

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