Octopus Transit has a $$1,000$ par value bond outstanding with $20$ years to maturity. The bond carries an annual interest payment of

$$108,$ payable semiannually, and is currently selling for $$1,112.$ Octopus is in a $30$ percent tax bracket. The firm wishes to know what the

aftertax cost of a new bond issue is likely to be$.$ The yield to maturity on the new issue will be the same as the yield to maturity on the

old issue because the risk and maturity date will be similar.

a$.$ Compute the yield to maturity on the old issue and use this as the yield for the new issue. $($Do not round intermediate calculations.

Round the final answer to $2$ decimal places.$)$

Yield on new issue

$\%$The Nolan Corporation finds that it is necessary to determine its marginal cost of capital. Nolan's current capital structure calls for $45$

percent debt, $25$ percent preferred stock, and $30$ percent common equity. Initially common equity will be in the form of retained

earnings $)$ and then new common stock $(K_n).$ The costs of the various sources of financing are as follows: debt, $7\mathrm{.}5$ percent;

preferred stock, $5$ percent; retained earnings, $13$ percent; and new common stock, $14\mathrm{.}2$ 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

b$.$ If the firm has $$15$ 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 $30$ 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 $7\mathrm{.}5$ percent cost of debt referred to above applies only to the first $$36$ million of debt. After that the cost of debt will be $8\mathrm{.}5$

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.$)$

b$.$ Make the appropriate tax adjustment to determine the aftertax cost of debt. $($Do not round intermediate calculations. Round the

final answer to $3$ decimal places.$)$

Cost of debt