What is the cost of capital if the firm uses bank loans

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Reference no: EM131338151

Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change. The firm's tax rate is 34%. The firm can issue the following securities to finance capital investments:

Debt: Capital can be raised through bank loans at a pretax cost of 8.5%. Also, bonds can be issued at a pretax cost of 10%.

Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $59. Flotation costs will be $3 per share. The recent common stock dividend was $3.15. Dividends are expected to grow at 7% in the future.

What is the cost of capital if the firm uses bank loans and retained earnings?

9.9%

10.4%

10.3%

11.8%

12.6%

Reference no: EM131338151

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