Problem:
Assume that a firm's manager decides to fund its entire investment need this year by issuing $500 million in bonds. After-tax cost of these bonds is 6%. The firm's optimal capital structure calls for 40% debt and 60% equity. The cost of equity is 16%.
Required:
Question: Which of the following statements is the most correct?
A) The firm should use 6% as the required rate of return for all projects this year.
B) The firm should use 6% as the required rate of return for all average-risk projects this year.
C) The firm should use 12% as cost of capital to evaluate average-risk projects.
D) Only B and C are correct statements.
E) Only A and B are correct statements.
D) None of the above is an answer.
Note: Explain all steps comprehensively.