The UM Company is evaluating its marginal cost of capital. In consultation with their investment bankers, they have determined that the cost of raising new debt and equity is as follows:

Any new capital that UM raises will be in the proportions of 40%
debt and 60% equity.

a. What is the marginal cost of capital if UM raises $1,000,000 new capital? How much of this new capital is debt? How much of this new capital is equity?

b. Calculate the marginal cost of capital schedule, determining the level and cost at each break-point in the schedule.

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Amount of New Debt Capital Cost $1 to $1,000,000 5% $1,000,001 to $2,000,000 7%