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Question
Following is information about Seasonal Products (SP) Corporation. The company has no preferred stock.
Type of Proportion of the
Type of Capital After-Tax Cost Capital Capital Structure
Debt, rdT 6.5% Debt 40.0%
Common equity Equity 60.0
Retained earnings, rs 12.0
New issue, re 15.0
The firm expects to retain $300,000 in earnings this year to invest in capital budgeting projects. If the SP's capital budget is expected to equal $550,000, what required rate of return, or marginal cost of capital, should be used when evaluating capital budgeting projects?
a. 9.80%
b. 11.60%
c. 9.25%
d. 11.17%
e. 9.90%
Answer
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