The management of a conservative firm has adopted a policy of never letting debt exceed $40$ percent of total financing. The firm will earn $$10,000,000$ but distribute $30$ percent in dividends, so the firm will have $$7,000,000$ to add to retained earnings. Currently the price of the stock is $$40$; the company pays a $$2$ per share dividend, which is expected to grow annually at $8$ percent. If the company sells new shares, the net to the company will be $$38.$ Given this information, what is the

cost of retained earnings? Round your answer to one decimal place.

$\%$

cost of new common stock? Round your answer to one decimal place.

$\%$

The rate of interest on the firm$$s long$-$term debt is $10$ percent and the firm is in the $32$ percent income tax bracket. If the firm issues more than $$2,600,000,$ the interest rate will rise to $11$ percent. Given this information, what is the

cost of debt? Round your answer to one decimal place.

$\%$

cost of debt in excess of $$2,600,000?$ Round your answer to one decimal place.

$\%$

The firm raises funds in increments of $$4,000,000$ consisting of $$1,600,000$ in debt and $$2,400,000$ in equity. This strategy maintains the capital structure of $40$ percent debt and $60$ percent equity. Develop the marginal cost of capital schedule through $$16,000,000.$ Round your answers for the break$-$points to the nearest dollar and for the marginal costs to one decimal place.

The marginal cost of capital schedule:

$$0-$ $

cost of debt:

$\%$

cost of equity:

$\%$

cost of capital:

$\%$

$

$-$ $

cost of debt:

$\%$

cost of equity:

$\%$

cost of capital:

$\%$

above $

cost of debt:

$\%$

cost of equity:

$\%$

cost of capital:

$\%$

What impact would each of the following have on the marginal cost of capital schedule?

the firm$$s income tax rate increases

If income tax rates were to rise, the effective cost of debt would

decline

$,$ and the marginal cost of capital would

decline

at all levels.

the firm retains all of its earnings and the price of the stock is unaffected. Round your answers for the break$-$point to the nearest dollar and for the marginal costs to one decimal place.

The marginal cost of capital schedule:

$$0-$ $

cost of debt:

$\%$

cost of equity:

$\%$

cost of capital:

$\%$

$

$-$ $

cost of debt:

$\%$

cost of equity:

$\%$

cost of capital:

$\%$

above $

cost of debt:

$\%$

cost of equity:

$\%$

cost of capital:

$\%$

$$16,000,000$ is insufficient to meet attractive investment opportunities

If the firm needs more than $$16,000,000$ that fact

does not alter

the marginal cost of capital schedule.