In: Finance
The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee’s current capital structure calls for 40 percent debt, 5 percent preferred stock, and 55 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt, 5.6 percent; preferred stock, 11.0 percent; retained earnings, 8.0 percent; and new common stock, 9.4 percent.
a. What is the initial weighted average cost of
capital? (Include debt, preferred stock, and common equity in the
form of retained earnings, Ke.) (Do not
round intermediate calculations. Input your answers as a percent
rounded to 2 decimal places.)
Weighted Cost | |
Debt | |
Preferred Stock | |
Common Equity | |
Weighted Average Cost of Capital | % |
b. If the firm has $22.0 million in retained
earnings, at what size capital structure will the firm run out of
retained earnings? (Enter your answer in millions of
dollars (e.g., $10 million should be entered as
"10").)
Capital Structure Size (X) _______ million
c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 55 percent of the capital structure, but will all be in the form of new common stock, Kn.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Marginal Cost of Capital ______%
d. The 5.6 percent cost of debt referred to
above applies only to the first $40 million of debt. After that,
the cost of debt will be 7.6 percent. At what size capital
structure will there be a change in the cost of debt?
(Enter your answer in millions of dollars (e.g., $10
million should be entered as "10").)
Capital Structure Size _____ million
e. What will the marginal cost of capital be immediately after that point? (Consider the facts in both parts c and d.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Marginal Cost of Capital _____%