Question
1. The following after-tax information pertains to Allen Corporation: Cost of debt for bonds issued, up to $120,000 8.5% Cost of debt for bonds issued
1. The following after-tax information pertains to Allen Corporation:
Cost of debt for bonds issued, up to $120,000 | 8.5% |
Cost of debt for bonds issued over $120,000 | 10.0% |
Cost of retained earnings | 12.0% |
Cost of new common shares | 13.0% |
Retained earnings available in the form of cash | $78,000 |
% of debt in capital structure | 40% |
% of common equity in capital structure | 60% |
Given this capital structure:
a. Calculate the amount of the largest project that could be funded using the available retained earnings. (1 mark)
b. Calculate the amount of the largest project that could be funded using 8.5% debt. (1 mark)
c. Calculate the percentage marginal cost of capital for amounts up to the amount calculated in Part a above. (2 marks)
d. Calculate the percentage marginal cost of capital for amounts between the amounts calculated in Part a and Part b. (2 marks)
e. Calculate the percentage marginal cost of capital for amounts above the amount calculated in Part b. (2 marks)
f. Calculate the overall percentage cost of capital for a project costing $500,000. (3 marks)
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