Cost of capital-
You have estimated the after-tax cost of debt to be 5.0%, the cost of preferred to be 6.5% and the cost of common to be 8.8%. Your firm obtains 35% of its financing from long-term debt, 25% of its financing from preferred stock and 40% of its financing from common stock. Calculate the firm’s cost of capital.
Since debt is the cheapest source of financing for the firm, all firms should obtain 99% of their financing from debt and only 1% from equity. True or false and explain your answer. Hint – review capital structure.