QUESTIONS 69 THROUGH 78 RELATE TO CORPORATE FINANCE

72. An analyst gathers the following information about the cost and availability of

raising various amounts of new debt and equity capital for a company:

Amount of new debt

Cost of debt

Amount of new equity

Cost of

(in millions)

(after tax)

equity

≤ €5.0

≤ €4.0

4%

13%

5%

> €4.0

> €5.0

15%

The company’s target capital structure is 60 percent equity and 40 percent debt.

If the company raises €9.5 million in new financing, the marginal cost of capital is

closest to:

A. 9.8%.

B. 10.6%.

C. 11.0%.