Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

please help! The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan's current capital structure calls for 3 5 percent

please help!
The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan's current capital structure calls for
35 percent debt, 25 percent preferred stock, and 40 percent common equity. Initially, common equity will be in the form of
retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt
(after-tax),8.6 percent; preferred stock, 8 percent; retained earnings, 14 percent; and new common stock, 15.2 percent.
a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of
retained earnings, Ke.)
Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.
b. If the firm has $16 million in retained earnings, at what size capital structure will the firm run out of retained earnings?
Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").
Capital structure size (x)c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 40 percent of the capital
structure, but will all be in the form of new common stock, Kn.)
Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.
d. The 8.6 percent cost of debt referred to earlier applies only to the first $28 million of debt. After that, the cost of debt will be
10.2 percent. At what size capital structure will there be a change in the cost of debt?
Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").
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.)
Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Income Tax Fundamentals 2013

Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill

31st Edition

1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516

Students also viewed these Finance questions