The Kalgog Precision Tool Company was recently formed to manufacture a new product. The company has the following capital structure in the market terms: 13 % debentures of 2005 60,00,000.00 12 % preferred stock 20,00,000.00 Common stock (320000 shares) 80,00,000.00 Total 1,60,00,000.00 The common stock sells for $25 a share, and the company has marginal tax rate of 40 percent.
A study of publicly held companies in this line of business suggests that the required return on equity is about 17 percent for company of this sort.
a- Compute the firm's weighted average cost of capital.
b- Is this figure computed an appropriate acceptance criterion for evaluating investment proposals?