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The management of a conservative firm has adopted a policy of never letting debt exceed 30 percent of total financing. The firm will earn $16,000,000

The management of a conservative firm has adopted a policy of never letting debt exceed 30 percent of total financing. The firm will earn $16,000,000 but distribute 40 percent in dividends, so the firm will have $9,600,000 to add to retained earnings. Currently the price of the stock is $60; 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 $58. Given this information, what is the

The rate of interest on the firms long-term debt is 12 percent and the firm is in the 32 percent income tax bracket. If the firm issues more than $2,300,000, the interest rate will rise to 13 percent. Given this information, what is the

The firm raises funds in increments of $2,400,000 consisting of $480,000 in debt and $1,920,000 in equity. This strategy maintains the capital structure of 20 percent debt and 80 percent equity. Develop the marginal cost of capital schedule through $10,000,000. 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?

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

    %

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

    %

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

    %

  4. cost of debt in excess of $2,300,000? Round your answer to one decimal place.

    %

  5. the firms income tax rate increases

    If income tax rates were to rise, the effective cost of debt would -Select-declinerisenot changeItem 18 , and the marginal cost of capital would -Select-declinerisenot changeItem 19 at all levels.

  6. 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: %

  7. $10,000,000 is insufficient to meet attractive investment opportunities

    If the firm needs more than $10,000,000 that fact -Select-increasesdecreasesdoes not alterItem 33 the marginal cost of capital schedule.

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