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Question - C Company, currently has $200 million of outstanding existing debt on its balance sheet. The debt consists of 20-year, $1000 bonds, presently selling at 70.10 % of face value. The coupon bond rate is 8%. Flotation costs on new bonds world raise the effective before tax interest cost to 0.5% above the yield to maturity on existing debt. The company has 10 million shares of common stock outstanding, with a market price of $30 per share. The stock's beta is one and half times that of the market, the risk-free rate is 10% and the average market risk premium is 5%. Flotation costs would raise the effective cost of new equity by 1% over the cost of existing equity. Over the next year, which is the company's capital investment planning period, the company expects to have $20 million of internally generated funds in addition to net income of $30 million. At least half of the net income must be paid out in dividends. The company faces a 35% marginal tax rate.
A. Prepare a marginal cost of capital schedule for the company and use a graph to illustrate it. (You need to determine, the cost of debt (YTM), cost of equity, the markets value of debt and equity and their respective weights).
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