Since debt is the cheapest source of financing for the firm

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Cost of capital-

You have estimated the after-tax cost of debt to be 5.0%, the cost of preferred to be 6.5% and the cost of common to be 8.8%. Your firm obtains 35% of its financing from long-term debt, 25% of its financing from preferred stock and 40% of its financing from common stock. Calculate the firm’s cost of capital.

Since debt is the cheapest source of financing for the firm, all firms should obtain 99% of their financing from debt and only 1% from equity. True or false and explain your answer. Hint – review capital structure.

Reference no: EM132038413

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