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The chief financial officer of Portland Oil has given you the assignment of determining the…

The chief financial officer of Portland Oil has given you the assignment of determining the firm’s marginal cost of capital. The present capital structure
which is considered optimal, is:

Book Value

Market Value

Debt

$ 50 million

$ 40 million

Preferred Stock

10 million

5 million

Common Equity

30 million

55 million

Total

$ 90 million

$ 100 million

The anticipated financing opportunities are these: Debt can be issued with a 15 percent before-tax cost. Preferred stock will be $100 par, carry a dividend
of 13 percent, and can be sold to net the firm $96 per share. Common equity has a beta of 1.20, the return on the market is 17 percent, and the risk-free
rate is 12 percent. If the firm’s tax rate is 40 percent, what is its marginal cost of capital?

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