c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 25 percent of the capital structure, but will all be in the form of new common stock, K₁,-) Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Marginal cost of capital d. The 7.2 percent cost of debt referred to above applies only to the first $50 million of debt. After that, the cost of debt will be 9.2 percent. At what size capital structure will there be a change in the cost of debt? Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10"). Capital structure size (2) million
c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 25 percent of the capital structure, but will all be in the form of new common stock, K₁,-) Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Marginal cost of capital d. The 7.2 percent cost of debt referred to above applies only to the first $50 million of debt. After that, the cost of debt will be 9.2 percent. At what size capital structure will there be a change in the cost of debt? Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10"). Capital structure size (2) million
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 25 percent of the capital structure, but
will all be in the form of new common stock, K₁ )
Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.
Marginal cost of capital
d. The 7.2 percent cost of debt referred to above applies only to the first $50 million of debt. After that, the cost of debt will be 9.2
percent. At what size capital structure will there be a change in the cost of debt?
Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").
Capital structure size (Z)
million
e. What will the marginal cost of capital be immediately after that point? (Consider the facts in both parts cand d.)
Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.
Marginal cost of capital
Transcribed Image Text:The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee's current capital structure calls for 50
percent debt, 25 percent preferred stock, and 25 percent common equity. Initially, common equity will be in the form of retained
earnings (K) and then new common stock (K). The costs of the various sources of financing are as follows: debt (after-tax), 7.2
percent; preferred stock, 10.0 percent, retained earnings, 12.0 percent; and new common stock, 13.2 percent.
a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained
earnings, K.)
Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.
Debt
Preferred stock
Common equity
Weighted average cost of capital
Weighted Cost
%
Capital structure size (X)
b. If the firm has $18.5 million in retained earnings, at what size capital structure will the firm run out of retained earnings?
Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").
0.00%
million
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