1. Calculate the after-tax cost of each component source of capital.
2. Calculate the marginal cost of capital for the various intervals, or “packages,” of capital the company can raise next year. Plot the marginal cost of capital curve.
3. Using the marginal cost of capital curve from question 2, and plotting the investment opportunity curve determine the company’s optimal capital budget for next year.
4. Should Project G be accepted or rejected? Why?
5. What factors do you feel might cause Bosworth to recommend a different capital budget than the one obtained in question 3?
6. Assume that a sudden rise in interest rates has caused the cost of various capital components to increase. The pretax cost of first-mortgage bonds has increased to 11 percent; the pretax cost of subordinated debentures has increased to 12.5 percent; the company’s common stock price has declined to $18; and new stock could be sold to net Marietta $16 per share.
a. Recompute the after-tax cost of the individual component sources of capital.
b. Recompute the marginal cost of capital for the various intervals of capital Marietta can raise next year.
c. Determine the optimal capital budget for next year at the higher cost of capital.
d. How does the interest rate surge affect Marietta’s optimal capital budget?

The Marietta Corporation, a large manufacturer of mufflers, tailpipes, and shock absorbers, is currently carrying out its financial planning for next year. In about two weeks, at the next meeting of the firm’s board of directors, Frank Bosworth, vice president of finance, is scheduled to present his recommendations for next year’s overall financial plan. He has asked Donna Botello, manager of financial planning, to gather the necessary information and perform the calculations for the financial plan.