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- The equity book value of MB Corporation is $5 million, and the market value of itscommon stock is $20 million. The market value of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the market risk premium is 8 percent. If the Treasury bond rate is 5 percent, what is the company's cost of capital? (Assume no taxes.)A) 10%B) 13%C) 14.25% D) 15%
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- Why is it important to include the tax effect into cost of capital computations for firms with debt financing? A. Firms pay taxes on the outstanding principal amount of the debt.B. Taxable income is reduced by the amount of the interest expense.C. Comparisons with equity financing would otherwise not be possible.D. Taxes are paid on interest but not on dividends.