Prepare an MCC Table and MCC Schedule showing the marginal cost of capital over the ranges of total financing.

1. Our current (and optimal) capital structure is $1,500,000 of long-term debt, $500,000 of preferred stock, and $3,000,000 of common equity. Our tax rate is 40% and our beta is 1.2. Our firm has consistent growth of 4% annually. A risk-free investment yields a 3% return and the market portfolio yields a 12% return.

Our investment bankers say that we can sell as many $1,000 bonds as we want to. They will have an 8% stated rate with interest paid annually. They mature in 10 years. The market rate for similar bonds is 7.5%. The investment bankers will charge us 10% of the price of the bonds as their fee. (Hint: Calculate the price the investors will pay = Po; then, calculate the net proceeds to our firm = PNet; then, calculate our cost of debt using Excels =YIELD ( ) function.)

We can also sell as much preferred stock as we wish at $110 per share. It has a par value of $100 and a stated dividend rate of 9%. We will incur a 5% flotation cost on the price.

We have 100,000 shares of common stock outstanding. Last year, our Net Income was $400,000 and our common dividend payout ratio was 70%. The current price of our stock is $30. If we want to sell more shares, we must pay a 15% fee to our underwriters and investment bankers. (HINT: When calculating retained earnings, be sure to subtract preferred dividends and common dividends from Net Income.)