Determine the firms cost of capital if the debt ratio rises, Financial Management

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Determine the firms cost of capital if the debt ratio rises

Given the following information:

interest rate 8%

tax rate 30%

dividend $1

price of the common stock $50

growth rate of dividends 7%

debt ratio 40%

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?

d. Why is this cost different?

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