Question

4. Seti Sugar Company was recently formed to manufacture a new product. The company has the following capital structure: 13% Debentures of 2005 12%Preferred stock Common stock (320000 shares) Rs 6 million 2 million 8 million The common stock sells for Rs 25 a share, and the company has a marginal tax rate of 40 percent. A study of publicly held companies in this line of business suggests that the required return on equity is about 17 percent for a company of this sort. Compute the firm's weighted average cost of capital. ution​

Answer 1

Answer:

The company has a marginal tax rate of 40 percent. A study of publicly held companies in this line of business suggests that the required return on equity is about 17 percent. (The CAPM approach was used to determine the required rate of return.) The Manx Company’s debt is currently yielding 13 percent, and its preferred stock is yielding 12 percent.