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NEW QUESTION: 1
DQZ Telecom is considering a project for the coming year, which will cost $50 million. DQZ plans to use
the following combination of debt and equity to finance the investment.
. Issue $15 million of 20-year bonds at a price of 101, with a coupon rate of 8 percent, and flotation costs
of 2 percent of par.
. Use $35 million of funds generated from earnings.
The equity market is expected to earn 12 percent. U.S. treasury bonds are currently yielding 5 percent.
The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax
rate of 40 percent.
The before-tax cost of DQZ's planned debt financing, net of flotation costs, in the first year is:
A. 7.92 percent.
B. 11.80 percent.
C. 10.00 percent.
D. 8.08 percent.
Answer: D
Explanation:
Choice "b" is correct. 8.08 percent before-tax cost of debt financing, net of flotation costs.



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