Medical Research Corporation is expanding its research and production capacity to introduce a new line of products.Current plans call for the expenditure of $100 million on four projects of equal size (25 million each) but different returns.Project A is in blood clotting proteins and has an expected return of 18%.Project B relates to hepatitis vaccine and carries a potential return of 14%.Project C dealing with a cardiovascular compound, is expected to earn 11.8 % and Project D and investment in orthopedic implants is expected to show a 10.9 % return.

The firm has $25,000,000 in retained earnings. After a capital structure with $25,000,000 million in retained earnings is reached (in which retained represents 60% of financing), all additional equity financing must come in the form of new common stock.

Common stock is selling for $27 per share and underwriting costs are estimated at $3 if new shares are issued.Dividends for the next year will be $.71 per share (D1) and earnings and dividends have grown consistently at 11% per year.

The yield on comparative bonds has be hovering at 11%.The investment banker feels that the first $19,000,000 of bonds could be sold to yield 11% while additional debt might require a 2% premium and be sold to yield 13%.The corporate tax rate is 30%.Debt represents 40% of capital structure.

a.Based on the two sources of financing, what is the initial weighted average cost of capital? (use Kd and Ke)

b.At what size capital structure will the firm run out of retained earnings?

c.What will the marginal cost of capital be immediately after that point?

d.At what size capital structure will there be a change in the cost of debt?

e.What will the marginal cost of capital be immediately after that point?