A firm can raise up to $700 million for investment from a mixture of debt, prefe

Question

A firm can raise up to $700 million for investment from a mixture of debt, preferred stock and retained equity. Above $700 million, the firm must issue new common stock. Assuming that debt costs and preferred stock costs remain unchanged, the marginal cost of capital for amounts up to $700 million will be ____ the marginal cost of capital for amounts over $700 million.

a. less than

b. equal to

c. greater than

d. cannot be determined from the information given

a. less than

b. equal to

c. greater than

d. cannot be determined from the information given

Explanation / Answer

d. cannot be determined from the information given

When the amount reaches of $700 million, we cannot be certain how much the common stock will cost the company at that time. It will depend on the market price that investors are willing to pay at that time.

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