Homework answers / question archive / The Nolan Corporation finds that it is necessary to determine its marginal cost of capital

The Nolan Corporation finds that it is necessary to determine its marginal cost of capital

Finance

Share With

The Nolan Corporation finds that it is necessary to determine its marginal cost of capital. Nolan's current capital structure calls for 40 percent debt, 25 percent preferred stock, and 35 percent common equity. Initially common equity will be in the form of retained earnings (K_e) and then new common stock (K_n). The costs of the various sources of financing are as follows: debt, 5.2 percent; preferred stock, 8 percent; retained earnings, 10 percent; and new common stock, 10.2 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_e.) (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

b) If the firm has $35 million in retained earnings, at what size of investment will the firm run out of retained earnings? (Enter the answer in millions.)

c) What will the marginal cost of capital be immediately after that point? (Equity will remain at 35 percent of the capital structure, but it will all be in the form of new common stock, K_n.) (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

d) The 5.2 percent cost of debt referred to above applies only to the first $22 million of debt. After that the cost of debt will be 7.2 percent. At what size of investment will there be a change in the cost of debt? (Enter the answer in millions.)

?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. Round the final answer to 2 decimal places.)