A firm borrows money at 8% with effective tax rate of 25%. The firm estimates that its cost of equity (expected return from shareholders) is 9%. The firm’s optimal capital structure is 70% debt/30% equity. What is the weight average cost of capital
return from shareholders?? ... the firm has 70% debt (it's leveraged into pre-bankruptcy) ... how can the firm pay a 9% return to shareholders ...borrow money @ 8%, and pay an effective tax rate (income tax) @ 25%?
more information is needed ...
--loans (actual dollar amount current/long term) ...cost 8%
--equity (actual dollar amount: is it dividends?) ...cost 9%