Cost of Capital

The cost of capital is defined as the rate of return that a company must offer on its securities in order
to In order to maintain its maintain its market value.
Financial managers must know the cost of capital in order to:
(1) make capital budgeting decisions;
(2) help to establish the optimal capital structure; and
(3) make decisions concerning leasing, bond refunding and working capital management.
The cost of capital is computed as a weighted average of the various capital components, items on the
right-hand side of the balance sheet such as debt, preferred stock, and retained earnings.

COMPUTING INDIVIDUAL COST OF CAPITAL

Each element of capital has a component cost that is identified by the following:
Ki= before tax cost of debt/ YTM
Kd= Ki(1-t) = after-tax cost of debt, where t= tax rate
Kp= cost of preferred stock
Ks= cost of retained earnings (or internal equity)
Ke= cost of external equity capital or cost of issuing new common stock
Ko= company’s overall cost of capital, or a weighted average cost of capital

Cost of Debt
You can compute before-tax cost of debt by determining the internal rate of return (IRR) (or yield to
maturity) on the bond cash flows.
Formula:
Par Value−Price
Coupon Rate interest +
t
YTM =
Price+ Par value/2
Since the interest payments are tax deductible, you must state the cost of debt on an after-tax basis,
which is:
Kd = ki (1-t)
EXAMPLE 1
Assume that the carter company issues a $1,000, 8 percent ,20-year bond whose net proceeds are
$940. Tax rate is 40 percent. Then the before tax cost of debt, K i or YTM is:

Therefore, the after-tax – cost of debt is:

Kd = Ki (1 – t)

Cost of Preferred Stock

The value of preferred stock is:
Preferred Dividends
Value of Preferred Stock=
Required Rate of Return
The cost of preferred stock (K p ) is found by dividing the annual preferred stock dividend (d p ) by
the net process from the sale fo preferred stock (P) as follows:
Preferred Dividends
K p= sale of PS ¿
Net proceed ¿

Since preferred stock dividends are not tax deductible, no tax adjustment is required.

EXAMPLE 2
Suppose that the carter company has preferred stock that pays a $13 dividend per share and sells for
$100 per share in the market. The flotation (or underwriting cost is 3 percent per share then the cost
of preferred stock is:

Cost of Equity Capital

The cost of any stock, K e , is generally viewed as the rate of return investors require on a
company’s common stock. There are two widely used techniques for measuring the cost of common
stock equity capital. The Gordon’s growth model and the capital asset pricing model (CAPM) approach.
The stream dividends is expected to grow at a constant rate. Using the Gordon Model (popularize by
Myron J. Gordon).
D1
Value of stock=
k s−g

Solving the model for k e yields the formula for the cost of common stock:
D1
k e= + g
P0
The symbol k s is changed to k e to show that it is used for the computation of cost of capital.

EXAMPLE 3
Assume that the market price of the carter company’s stock is $40, The dividend to be paid at the end
of the coming year is $4 per share it is expected to grow at a constant annual rate of 6 percent. Then
the cost of the common stock is:

The cost of new common stock, or external equity capital is higher than the cost of existing common
stock because of the flotation costs involved in selling the new stock. Flotation costs, sometimes called
issuance costs, are the total cost of issuing the selling a security, including printing and engraving,
legal fees, and accounting fees.
If f is flotation cost in percent, the formula for the cost of new common stock is:
D1
k e= +g
P0 (1−f )

EXAMPLE 4
Assume the same data as in example 3, except that the corporation is trying to sell new issues of
stock A and its flotation cost is 10 percent.

The Capital asset Pricing Model Approach. To use this alternative approach to measuring the cost
of common stock, you must:
Capital Asset Pricing Model (CAPM)
• A model based on the proposition that any stocks required rate of return is equal to the risk free rate
of return plus a risk premium that reflect only the risk remaining after diversification.
• An import tool used to analyze the relationship between risk and rates of return.

The Concept of Beta

• The tendency of a stock to move up and down with the market is reflected in its Beta Coefficient.
• Beta is a key element of CAPM

Formula:
Expected Return=Risk−free rate+ Beta ( Expected Return on Market −Risk−free rate )

Risk Premium = Expected return on market less Risk-free rate

EXAMPLE 5
Assuming that risk free is 7%, beta is 1.5, and return on market is 13%, using CAPM compute cost of
common stocks.

Cost of Retained Earnings

The cost of retained earnings, k e, is closely related to the cost of equity obtained by retained earnings
is the same as the rate of return investors require on the company’s common stock, meaning,
required rate of returnk e must be equal to its expected rate of return k s. Further, its required rate of
return (required return) is equal to risk-free rate, k RF , plus a risk premium, RF, whereas the excepted
return on a constant growth stock is the stock’s dividend yield, D 1/ P0, plus its expected growth rate,
g. Therefore:
Required rate of return = Expected rate of return
k s = k RF + RP = D 1/ P 0 + g = k s

Retained Earnings Breakpoint

The retained earnings breakpoint represents the total amount of financing that can be raised before
the firm is forced to sell new common stock. This breakpoint can be calculated as follows:
Retained Earnings Breakpoint = Addition to RE/Equity fraction

EXAMPLES 6
FM addition to retained earnings in 2003 is expected to be P68 million, and its capital structure
consists of 45 percent debt, 2 percent preferred, and 53 percent equity. Compute Retained Earnings
breakpoint.

Composite or Weighted Average Cost of Capital (WACC)

Target (optimal) Capital Structure defined as that mix of debt, preferred, and common equity that
causes its stock price to be maximized. The target proportions of debt, preferred stock, and common
equity, along with the cost components, are used to calculate the firm’s weighted average cost of
capital, WACC.
Formula:
WACC=W d K d ( 1−tax ) +W p K p +W c K s

Assessment Task
THEORIES:

1. When establishing their optimal capital structure, firms should strive to

A. minimize the weighted average cost of capital
B. minimize the amount of debt financing used
C. maximize the marginal cost of capital
D. none of the given choices

2. The mix of debt, preferred stock, and common equity with which the firm plans to raise capital
is called the
A. financial risk
B. operating leverage
C. business risk
D. target capital structure

3. The mix of debt and equity that minimizes the cost of capital is the
A. optimal operating leverage
B. target financial structure
C. optimal degree of combined leverage
D. optimal capital structure

4. The price of a stock is the:

A. future value of all expected future dividends, discounted at the dividend growth rate.
B. present value of all expected future dividends, discounted at the dividend growth rate.
C. future value of all expected future dividends, discounted at the investor’s required return.
D. present value of all expected future dividends, discounted at the investor’s required
return.

5. What happens when a bond's expected cash flows are discounted at a rate lower than the
bond's coupon rate?
A. The price of the bond increases
B. The coupon rate of the bond increases
C. The par value of the bond decreases
D. The coupon payments will be adjusted to the new discount rate

6. The discount rate that makes the present value of a bond's payments equal to its price is
termed the:
A. rate of return
B. yield to maturity
C. current yield
D. coupon rate

7. The value of the stock

A. Increases as the dividend growth rate decreases
B. Increases as the required rate of return decreases
C. Increases as the required rate of return increases
D. None of the given responses

8. The overall cost of long-term financing for the firm is called the:
A. weighted average cost of capital
B. cost of preferred stock
C. retained earnings breakpoint
D. none of the given choices

9. The overall weighted average cost of capital is used instead of costs for specific sources of funds
because
A. the use of the cost for specific sources of capital would make investment decisions
inconsistent.
B. a project with the highest return would always be accepted under the specific cost criteria.
C. an investment funded by equity or debt is not relevant to this question
D. none of the given choices.

10. Which of the following is not a component used in calculating the cost of capital?
A. Cost of short-term debt.
B. Cost of long-term debt.
C. Cost of common stock.
D. Cost of retained earnings.

11. The most expensive source of financing for a firm is:

A. debt
B. preferred stock
 C. retained earnings
D. new common stock

12. The cost of capital at the retained earnings breakpoint is the:

A. weighted average cost of capital
B. marginal cost of capital
C. cost of new stock
D. none of the given choices

13. Which of the following is not associated with the cost of capital concept?
A. Minimum rate of return on new projects.
B. Weighted average of cost of new funds raised.
C. The required rate of return of investors.
D. The historical cost of funds.

14. Which of the following is likely to increase a firm's cost of capital?

A. Increasing the proportion of equity in the firm.
B. Increasing the proportion of debt in the firm.
C. The consideration of a below-average risk project.
D. Expectation of lower inflation in the future.

15. The dividend growth model, when used, assumes that the total return on a share of common
stock is comprised of a:
A. capital gains yield and a dividend growth rate.
B. capital gains growth rate and a dividend growth rate.
C. dividend yield and the expected price next year.
D. dividend yield and a capital gains yield.

16. The capital asset pricing model (CAPM) states that the expected:
A. risk premium on an investment is proportional to its beta.
B. rate of return on an investment is proportional to its beta.
C. rate of return on an investment depends on the risk-free rate and the market rate of return.
D. rate of return on an investment is dependent on the risk-free rate.

17. If an individual stock's beta is higher than 1.0, that stock is:
A. exactly as risky as the market.
B. riskier than the market.
C. less risky than the market.
D. none of the given choices

18. The component of the risk-adjusted discount rate that is derived from the risk of Treasury
securities is:
A. risk premium
B. cost of capital
C. call premium
D. risk-free rate

19. The component of the risk-adjusted discount rate that compensates the investor for holding
risky assets is the:
A. risk-free rate
B. cost of capital
C. risk premium
D. none of the given choices

20. Which of the following is incorrect regarding the measurement and interpretation of the beta
of a security?
A. Not all securities are equally affected by fluctuations in the market.
B. The sensitivity of a stock to market movements is known as alpha.
C. Stocks with a beta greater than 1.0 are particularly sensitive to market fluctuations.
Those with a beta of less than 1.0 are not so sensitive to such movements.
D. The average beta of all stocks is 1.0.

21. If you were willing to bet that the overall stock market was heading up on a sustained basis,
it would be logical to invest in:
A. high beta stocks.
B. low beta stocks.
C. stocks with large amounts of unique risk.
D. stocks that plot below the security market line.

22. What will happen to the expected return on a stock with a beta of 1.5 and a market risk
premium of 9% if the Treasury bill yield increases from 3% to 5%?
A. The expected return will remain unchanged.
 B. The expected return will increase by 1.0%.
C. The expected return will increase by 2.0%.
D. The expected return will increase by 3.0%.

23. Which one of the following statements is true regarding the beta coefficient?
A. Beta is a measure of unsystematic risk.
B. A beta greater than one represents less systematic risk than the market.
C. Generally speaking, the higher the beta the higher the expected return.
D. A beta of one indicates an asset is totally risk-free.

24. The major benefit of diversification is to:

A. increase the expected return.
B. remove negative risk assets from the portfolio.
C. reduce the portfolio's systematic risk.
D. reduce the expected risk

25. Stocks that have high financial rewards are generally accompanied by:
A. high dividend payments
B. low dividend payments because of internally generated growth
C. high risk
D. All of the given choices

26. The market risk premium is the:

A. difference between the rate of return on an asset and the risk-free rate.
B. difference between the rate of return on the market portfolio and the risk-free rate.
C. risk-free rate.
D. market rate of return.

27. Using the company’s cost of capital to evaluate a project is:

A. always correct
B. always incorrect
C. correct for projects that are about as risky as the average of the firm's other assets
D. none of the given choices

28. In calculating the cost of common stock equity, the model that has the stronger theoretical
foundation is the:
A. constant growth model.
B. variable growth model.
C. Gordon model.
D. capital asset pricing model.

29. Which of the following methods explicitly recognizes a firm’s risk when determining the
estimated cost of equity?
A. Capital asset pricing model
B. Dividend-yield-plus-growth model
C. Bond-yield-plus model
D. Return on equity

30. In practice, dividends

A. usually exhibit greater stability than earnings
B. fluctuate more widely than earnings
C. tend to be a lower percentage of earnings for mature firms
D. are usually changed every year to reflect earnings changes

31. A measure that describes the risk of an investment project relative to other investments in
general is the
A. Coefficient of variation
B. Standard deviation
C. Beta coefficient
D. Expected return

ROBLEMS:
1. Leverage Corporation has a capital structure that consists of 65% equity and 35% debt. The
company expects to report P100 million in net income this year, and 67.5% of the net income
will be paid out as dividends. How large can the firm's capital budget be this year without it
having to include the cost of new common stock in its cost of capital analysis?
A. P100.0 million
B. P 67.5 million
C. P 50.0 million
D. P 32.5 million

2. The Equity Company projects the following for the upcoming year:
 Earnings before interest and taxes P40 million
Interest expense P 5 million
Preferred stock dividends P 4 million
Common stock dividend payout ratio 20%
Average number of common shares outstanding 2 million
Effective corporate income tax rate 40%
The expected dividend per share of common stock is
A. P1.70
B. P1.86
C. P2.10
D. P1.00

1. How much will a firm need in cash flow before tax and interest to satisfy debt holders and
equity holders if the tax rate is 40%, there is P10 million in common stock requiring a 12%
return, and P6 million in bonds requiring an 8% return?
A. P1,392,000
B. P1,488,000
C. P2,480,000
D. P2,800,000

3. During the past five years, Pledge Company had consistently paid 50% of earnings available
to common as dividends. Next year, the Pledge Company projects its net income, before the
P1.2 million preferred dividends, at P6 million.
The capital structure for the company is maintained at:
Debt 25.5%
Preferred stock 15.0%
Common equity 60.0%
What is the retained earnings break-point next year?
A. P5,760,000
B. P4,800,000
C. P4,000,000
D. P6,000,000

4. Cartel Company expects P30 million in earnings next year. Its dividend payout ratio is 40
percent, and its equity to asset ratio is 40 percent. Cartel Company uses no preferred stock.
At what amount of financing will there be a break point in Cartel’s cost of capital?
A. P45 million
B. P20 million
C. P30 million
D. P18 million

5. The Florida Co. has an equity cost of capital of 17%. The debt to equity ratio is 1.5 and a cost of
debt is 11%. What is the weighted average cost of capital of the firm? (Assume a tax rate of
33%)
A. 3.06%
B. 13.40%
C. 16.97%
D. 15.52%

6. Lion Company will pay a dividend of P1.50 per share at the end of next 12 months. The
required rate of return for Lion’s share is 10 percent and the constant growth rate is 5
percent.
The approximately current market price per common share of Lion stock is
A. P30.00
B. P10.00
C. P15.00
D. P26.63

7. Heidi Company plans to issue some P100 preferred stock with an 11 percent dividend. The
stock is selling on the market for P97, and Heidi must pay flotation costs of 5 percent of the
market price. The company is under the 40 percent corporate tax rate.
The cost of preferred stock for Heidi Company is
A. 7.16 percent
B. 11.34 percent
C. 6.80 percent
D. 11.94 percent

8. If a share of stock provided a 14.0% nominal rate of return over the previous year while the
real rate of return was 6.0%, then the inflation rate was:
A. 1.89%
B. 7.55%
 C. 8.00%
D. 9.12%

9. Milky Way, Inc. paid a cash dividend to its common shareholders over the past twelve months
of P2.20 per share. The current market value of the common stock is P40 per share and
investors are anticipating the common dividend to grow at a rate of 6% per annum. The cost
to issue new common stock will be 5 percent of the market value. The expected returns on
retained earnings is
A. 12.14 percent
B. 11.83 percent
C. 11.79 percent
D. 14.05 percent

10. What is the estimated required rate of return for equity investors if a stock sells for P40 and
will pay a P4.40 dividend that is expected to grow at a constant rate of 5%?
A. 7.6%
B. 12.0%
C. 12.6%
D. 16.0%

11. The earnings, dividends, and stock price of Sum Company are expected to grow at 7 percent
per year after this year. Sum Company’s common stock sells for P23 per share, its last
dividend was P2.00 and the company pay P2.14 at the end of the current year. Sum Company
should pay P2.50 flotation cost.
Using the dividend growth model, what is the expected cost of retained earnings for Sum
Company?
A. 10.44 percent
B. 16.30 percent
C. 9.30 percent
D. 17.44 percent

12. The Wind Company’s last dividend was P3.00; its growth rate is 6 percent and the stock now
sells for P36. New stock can be sold to net the firm P32.40 per share.
What is Wind Company’s cost of new common stock?
A. 14.83 percent
B. 15.81 percent
C. 15.26 percent
D. 9.69 percent

13. Platter Company’s stock is currently selling for P60 a share. The firm is expected to earn
P5.40 per share and to pay a year-end dividend of P3.60.
If investors require a 9 percent return, what rate of growth must be expected for Platter?
A. Zero growth
B. 3.0 percent
C. 40.0 percent
D. 50.0 percent

14. Cielo del Mar, an investor, receives a 15% total return by purchasing a stock for P40 and selling
it after one year with a 10% capital gain. How much was received in dividend income during the
year?
A. P2.00
B. P2.20
C. P4.00
D. P6.00

15. Alternate Company’s stock currently sells for P45.00 per share. It is expected to pay a dividend
of P3.10 next year, its growth rate is a constant 7.0%, and the company will incur a flotation
cost of 12.0% of the market value if it sells new common stock. The firm's tax is 40%. What is
the firm's cost of retained earnings?
A. 13.89%
B. 14.37%
C. 15.38%
D. 14.83%

16. If a stock is purchased for P25 per share and held one year, during which time a P3.50 dividend
is paid and the price climbs to P28.25, the nominal rate of return is:
A. 13.00%
B. 14.00%
C. 23.01%
D. 27.00%
17. Given a stock price of P39.77 and an expected return to shareholders of 12.4%, what is the
likely growth rate if the annual dividend next year is expected to be P3.50?
A. 0.0%
B. 3.6%
C. 8.4%
D. 12.4%
19. Dalmatian Co. is currently paying a dividend of P2.20 per share. The dividends are expected to
grow at 25% per year for the next four years and then grow 5% per year thereafter. Calculate
the expected dividend in year 6.
A. P5.37
B. P2.95
C. P5.92
D. P8.39

20. According to CAPM estimates, what is the cost of equity for a firm with beta of 1.5 when the
risk-free interest rate is 6% and the expected return on the market portfolio is 15%?
A. 19.5%
B. 21.0%
C. 22.5%
D. 24.0%

21. The expected return on Globe Oil stock is 18.95%. If the market premium is 8.2% and the
risk-free rate is 6.4%, what is the beta of Globe Oil stock?
A. 2.88
B. 1.53
C. 1.30
D. 6.97

22. An investor was expecting a 18% return on his portfolio with beta of 1.25 before the market risk
premium increased from 8% to 10%. Based on this change, what return will now be expected
on the portfolio?
A. 20.0%
B. 20.5%
C. 22.5%
D. 26.0%

23. The expected rate of return of stock of Phoslate Company, given a beta of 1.25, risk-free rate of
7.5%, and a market risk premium of 6%, is:
A. 9.0%
B. 13.5%
C. 15.4%
D. 15.0%
24. What is the risk-free rate given a beta of 0.8, a market risk premium of 6%, and an expected
return of 9.8%?
A. 3.2%
B. 5.0%
C. 5.2%
D. 6.8%

25. The earnings, dividends, and stock price of Equity, Inc. are expected to grow at 7 percent per
year after this year. Equity’s common stock sells for P23 per share, its last dividend was
P2.00 and will pay P2.14 at the end of the current year. Equity should pay P2.50 flotation
cost.
If the firm’s beta is 1.75, the risk-free rate is 8 percent, and the average return on the market
is 12 percent, what will be the firm’s cost of equity using the CAPM approach?
A. 16.05 percent
B. 15.00 percent
C. 14.27 percent
D. 14.00 percent

26. The following data are related to Samba stock:

Required return on Samba common 15 percent
Beta coefficient 1.5
Risk-free rate 9.0 percent
The required market return is
A. 13.0 percent
B. 18.0 percent
C. 25.0 percent
D. 16.0 percent

27. What is the required rate of return for a security with a Beta of .8 when the market return is 12
percent, the real rate of return is 3 percent, and the expected inflation premium is 2 percent?
A. 17.8 percent
B. 8.6 percent
C. 10.6 percent
D. 12.6 percent

28. What is the asset beta given the debt beta is .2, the equity beta is 1.4, the market value of
equity is P45 million, and the market value of debt is P15 million?
A. 0.20
B. 1.10
C. 1.40
D. 1.50

29. The market value of Negros Company's equity is P15 million, and the market value of its risk-
free debt is P5 million. If the required rate of return on the equity is 20% and that on the debt is
8%, calculate the company's cost of capital. (Assume no taxes.)
A. 17%
B. 20%
C. 8.1%
D. None of the above

30. Assume the following information about a firm's capital components:

Capital Structure Cost
Debt P2 M 8%
Preferred stock P2 M 11%
Common stock P6 M 14%
What is the firm’s weighted-average cost of capital?
A. 11.00%
B. 11.90%
C. 12.05%
D. 12.20%

31. The company cost of capital for a firm with a 60/40 debt/equity split, 8% cost of debt, 15% cost
of equity, and a 35% tax rate would be:
A. 7.02%
B. 9.12%
C. 10.80%
D. 13.80%
32. The Nut Corporation finds that it is necessary to determine its marginal cost of capital. Nut’s
current capital structure calls for 45 percent debt, 15 percent preferred stock and 40 percent
common equity. The costs of the various sources of financing are as follows: debt, after-tax
5.6 percent; preferred stock, 9 percent; retained earnings, 12 percent; and new common
stock, 13.2 percent. If the firm has P12 million retained earnings, and Nut has an
 opportunity to invest in an attractive project that costs P45 million, what is the marginal cost
of capital of Nut Corporation?
A. 8.83 percent
B. 8.91 percent
C. P9.95 percent
D. P12.40 percent

33. A firm has common stock with a market price of P100 per share and an expected dividend of
P5.61 per share at the end of 2007. A new issue of stock is expected to be sold for P98, with
a P2 per share representing the underpricing necessary in the competitive capital market.
Flotation costs are expected to total P1 per share. The dividends paid on the outstanding
stock last 5 years are:
Year Dividend
2002 P4.00
2003 4.28
2004 4.58
2005 4.90
2006 5.24

What is the expected returns on the new issue of common stock in January 2006?
A. 5.8 percent
B. 7.7 percent
C. 10.8 percent
D. 12.8 percent

34. Silverwares Company is expecting their sales to decline due to the increased interest in
disposable wares. Thus, the company has announced that they will be reducing their annual
dividend by 4 percent a year for the next four years. After that, they will maintain a constant
dividend of P1 a share. Last year, the company paid P1.80 per share. What is this stock worth to
you if you require a 12 percent rate of return? 
A.  P9.29 C. P11.30
B. P10.27 D.  P12.07
35. Home Builders, Inc. is a very cyclical type of business which is reflected in their dividend policy.
The firm pays a P3.50 per share dividend every other year. The next dividend will be paid end of
this year. Four years from now, the company plans to pay a P77 liquidating dividend per share.
What is the current market value of this stock if the market rate of return is 18.5 percent? 
A. P43.32
B. P44.11
C. P46.59
D. P48.37

36. Last week, Tutuban Company paid an annual dividend of P2.44 per share. The company has
been reducing the dividends by 15 percent each year. How much are you willing to pay to
purchase stock in this company if your required rate of return is 16 percent?
A.  P6.69
B.  P7.87
C.  P36.60
D.  P244.00

The Solar Laboratories, Inc., a multinational company, is expanding its research and production
capacity to introduce a new line of products. Current plans call for the expenditure of P100 million on
four projects of equal size (P25 million each), but different returns. Project A is in blood clotting
proteins and has an expected return of 18 percent. Project B relates to a hepatitis vaccine and carries
a potential return of 14 percent. Project C, dealing with a cardiovascular compound, is expected to
earn 11.8 percent and Project D, an investment in orthopedic implants, is expected to show a 10.9
percent return.

The firm has P15 million in retained earnings. After a capital structure with P15 million in retained
earnings is reached (in which retained earnings represent 60 percent of the financing), all additional
equity financing must come in the form of new common stock.
Common stock is selling for P25 per share and underwriting costs are estimated at P3 if new shares
are issued. Dividends for the next year will be P.90 per share (D 1), and earnings and dividends have
grown consistently at 11 percent.
The yield on comparative bonds has been hovering at 11 percent. The investment banker feels that
the first P20 million of bonds could be sold to yield 11 percent while additional debt might require a 2
percent premium and be sold to yield 13 percent. The corporate tax rate is 30 percent. Debt
represents 40 percent of the capital structure.
37. The expected returns on common equity are:
Retained Earnings Common Shares
A. 14.6% 15.1%
B. 15.0% 15.5%
C. 15.1% 14.6%
D. 15.5% 15.0%
38. What is the initial weighted average cost of capita?
A. 13.2%
B. 12.1%
C. 11.8%
D. 9.2%

39. At what size of the capital structure would there be a change in the cost of equity component?
A. P15 million
B. P20 million
C. P25 million
D. P50 million
40. What is the marginal cost of capital of capital at retained earnings breakpoint?
A. 11.84%
B. 9.42%
C. 12.38%
D. 12.14%

41. At what size of capital structure will there be a change in the cost of debt?
A. P20 million
B. P25 million
C. P50 million
D. P75 million

42. The selection of the project is based on ranking of profitability. What is the marginal cost of
capital What is the expected marginal cost of capital of financing Project C?
A. 12.9%
B. 12.4%
C. 12.7%
D. 10.2%

43. Which of the four project will be accepted by the company?

A. Project A only.
B. Project A and B only.
C. Project A, B, and C.
D. All of them.