The firm's cost of debt is 9 percent, and the cost of retained earnings is 15 percent. However, if the firm exhausts its retained earnings of $236,780, the cost of equity rises to 15.9 percent. Currently management believes that the firm's current combination of 35 percent debt and 65 percent equity is the optimal capital structure. a. What is the firm's cost of capital if it uses only retained earnings? b. What is the firm's cost of capital if it uses new equity? c. How much total financing may the firm have before the marginal cost of capital rises?

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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The firm's cost of debt is 9 percent, and the cost of retained earnings is 15 percent. However, if the firm exhausts its retained
earnings of $236,780, the cost of equity rises to 15.9 percent. Currently management believes that the firm's current combination
of 35 percent debt and 65 percent equity is the optimal capital structure.
a. What is the firm's cost of capital if it uses only retained earnings?
b. What is the firm's cost of capital if it uses new equity?
c. How much total financing may the firm have before the marginal cost of capital rises?
Transcribed Image Text:The firm's cost of debt is 9 percent, and the cost of retained earnings is 15 percent. However, if the firm exhausts its retained earnings of $236,780, the cost of equity rises to 15.9 percent. Currently management believes that the firm's current combination of 35 percent debt and 65 percent equity is the optimal capital structure. a. What is the firm's cost of capital if it uses only retained earnings? b. What is the firm's cost of capital if it uses new equity? c. How much total financing may the firm have before the marginal cost of capital rises?
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