Problem:
Donner Inc will finance a proposed investment by issuing new securities while maintaining its optimal capital structure of 60% debt and 40% equity. The firm can issue bonds at a price of $950.00 before the $15 flotation costs. The 10-year bonds will have an annual coupon rate of 8% and a face value of $1000. The company can issue new equity at a before -tax cost of 16% and its marginal tax rate is 34%.
Required:
Question: What is the appropriate cost of capital to use in analyzing this project.
A. 3.63%
B. 11.81%
C. 8.77%
D. 9.97%
Note: Please provide reasons to support your answer.