The gearing company has an after tax cost of debt

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8. The Gearing Company has an after-tax cost of debt capital of 4%, a cost of preferred stock of 8%, a cost of equity capital of 10%, and a weighted average cost of capital of 7%. Gearing intends to maintain its current capital structure as it raises additional capital. In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is: 9. Fran McClure of Alba Advisers is estimating the cost of capital of Frontier Corporation as part of her valuation analysis of Frontier. McClure will be using this estimate, along with projected cash flows from Frontier’s new projects, to estimate the effect of these new projects on the value of Frontier. McClure has gathered the following information on Frontier Corporation: Current Year Forecasted for Next Year Book value of debt $50 $50 Market value of debt $62 $63 Book value of shareholders’ equity $55 $58 Market value of shareholders’ equity $210 $220 The weights that McClure should apply in estimating Frontier’s cost of capital for debt and equity are, respectively:
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A. wd ¼ 0.200; we ¼ 0.800. B. wd ¼ 0.185; we ¼ 0.815. C. wd ¼ 0.223; we ¼ 0.777.
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