A firm needs to raise $123 million for a proposed capital expansion project. It's earnings breakpoint is $178 million and it is committed to maintaining a debt-to- equity ratio of 1.2. Its after-tax cost of debt is6.2% and the required rate of return on its equity is 13.2%. The firm's marginal cost of capital for the project equals
________.
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A. B. C. D.C
Since the proposed capital requirement of $123 million is less than the earnings breakpoint, the firm's marginal cost of capital for the project equals its WACC.
With D/E = 1.2, E/(D+E) = 1/(1+1.2) = 0.455. The WACC then equals 0.455*13.2% + 0.545*6.2% = 9.38%.