1- The Nolan Corporation finds that it is necessary to determine its marginal cost of capital. Nolans current capital structure calls for 50 percent debt, 30 percent preferred stock, and 20 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, 9.6 percent; preferred stock, 9 percent; retained earnings, 10 percent; and new common stock, 11.2 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.)

Weighted average cost of capital %

2- Larrys Athletic Lounge is considering an expansion program to increase the sophistication of the exercise equipment. The equipment will cost $27,900 and has an estimated life of five years. Larry is not sure how many members the new equipment will attract, but he estimates that his increased annual cash flows for each of the next five years will have the following probability distribution. Larrys cost of capital is 15 percent.

Probability	Cash flow
0.1	$4,570
0.3	5,550
0.4	7,400
0.2	9,930

a. What is the expected cash flow?

Expected cash flow $

b-1. What is the expected NPV? (Round "PV Factor" to 3 decimal places. Negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to the nearest whole dollar. Omit $ sign in the answer.)

NPV $

b-2. What is the expected IRR? (Round "PV Factor" to 3 decimal places. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

IRR %

c. Should Larry buy the new equipment?

multiple choice

No

Yes

b. If the firm has $18 million in retained earnings, at what size of investment will the firm run out of retained earnings? (Enter the answer in millions.)

Capital structure size (X) $ million

c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 20 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.)

Marginal cost of capital %

d. The 9.6 percent cost of debt referred to above applies only to the first $29 million of debt. After that the cost of debt will be 11.2 percent. At what size of investment will there be a change in the cost of debt? (Enter the answer in millions.)

Capital structure size (Z) $ 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. Round the final answer to 2 decimal places.)

Marginal cost of capital %