Given the Following Information ​
A Determine the Firm's Cost of Capital

Essay

Given the following information: $$\begin{array} { l c } \text { interest rate } & 8 \% \\\text { tax rate } & 30 \% \\\text { dividend } & \$ 1 \\\text { price of the common stock } & \$ 50 \\\text { growth rate of dividends } & 7 \% \\\text { debt ratio } & 40 \%\end{array}$$ ​
a. Determine the firm's cost of capital.
b. If the debt ratio rises to 50 percent and the cost of funds remains the same, what is the new cost of capital?
c. If the debt ratio rises to 60 percent, the interest rate rises to 9 percent, and the price of the stock falls to $30, what is the cost of capital? Why is this cost different?