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Question
Bay State Technology has determined that its cost of equity is 15% and its after-tax cost of debt is 7.2%. Bay State expects to earn $14 million after taxes next year and, as a new firm, does not pay any dividends. The stock sells for $24. Bonds are currently selling at par value. Compute Bay State's weighted cost of capital. A partial balance sheet is shown below:| Current liabilities | $ 300,000 |
| Long-term debt | 1,000,000 |
| Common stock at $1 par | 100,000 |
| Paid in capital | 900,000 |
| Retained earnings | 3,000,000 |
| Total liabilities and stockholders' equity | $5,300,000 |
a. 13.4%
b. 13.1%
c. 11.6%
d. 12.7%
Answer
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