Firms cost of debt and the cost of equity capital

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Suppose Mr. Thomas, president of your company, has hired you to determine the firm's cost of debt and the cost of equity capital. Based on the most recent financial statements, the company's total liabilities are $8 millions. Total interest expense for the coming year will be about $1 million. Mr. Thomas therefore reasons, "We owe $8 million, and we will pay $1 million interest. Therefore, our cost of debt is obviously 12.5% = 1 / 8." What is wrong with this conclusion?

Reference no: EM131010304

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