Corporate Finance Q78

78Digital Design Corporation has an after-tax cost of debt capital of 7 percent, a cost of preferred stock of 9 percent, a cost of equity capital of 11 percent, and a weighted average cost of capital of 8.5 percent. In raising additional capital, the company intends to maintain its current capital structure. In order to make a capital - budgeting decision for an average risk project, the relevant cost of capital is:

Option : B
Explanation : The best estimate of cost of capital for an average-risk project of a company is the weighted average cost of capital using weights derived from the current capital structure.

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