Managerial Economics 13th Edition by James McGuigan,Charles Moyer,Frederick Harris

Exercise 3

The Williams Company has a present capital structure (that it considers optimal) consisting of 30 percent long-term debt and 70 percent common equity. The company plans to finance next year's capital budget with additional long-term debt and retained earnings. New debt can be issued at a coupon interest rate of 10 percent. The cost of retained earnings (internal equity) is estimated at 15 percent. The company's marginal tax rate is 40 percent.Calculate the company's weighted cost of capital for the coming year.