The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee'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 W.). The costs of the various sources of financing are as follows: debt (after-tax). 70 percent preferred stock. 8.0 percent, retained earnings, 14.0 percent, and new common stock, 154 percent. .. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings. Ke) (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost % Debt Preferred stock Common equity Weighted average cost of capital 0.00% b. If the firm has $300 million in retained earnings at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").) Capital structure size (X) million 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.x) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Marginal cost of capital 94 d. The 70 percent cost of debt referred to above applies only to the first $28 million of debt. After that, the cost of debt will be 96 percent. At what size capital structure will there be a change in the cost of debt? (Enter your answer in millions of dollars (e.g- $10 million should be entered as "10").) Capital structure size (2) million e. What will the marginal cost of capital be immediately after that point? (Consider the facts in both parts cand d) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Marginal cost of capital 9 Prev Next >