Durocorp Has a Target Capital Structure of 30% Debt and 70

question 20

Multiple Choice

Durocorp has a target capital structure of 30% debt and 70% equity.Durocorp is planning to invest in a project that will necessitate raising new capital.New debt will be issued at a before-tax yield of 14%,with a coupon rate of 10%.The equity will be provided by internally generated funds so no new outside equity will be issued.If the required rate of return on the firm's stock is 22% and its marginal tax rate is 35%,compute the firm's cost of capital.

• A) 18.00%
• B) 18.13%
• C) 19.68%
• D) 15.55%