You are on your way to a meeting with the board of directors. In your hand is a report prepared by your finance manager. The report is the main reason why the meeting is being held. In addition to the report, you are also contemplating how to outline the effect on the capital structure when the firm hits the 50% percent debt level.

Instructions:

1. Put into words the financial report prepared by your finance manager. Make an assumption of a corporate operational or investment plan where the financial report below will be applied appropriately. Make a recommendation and state your reason(s).

2. In addition to no. 1, disclose the effect on the capital structure when the firm hits the 50% debt level.

a.

Cost (after tax) Weights Weighted Cost

Plan A

Debt 6.0% 20% 1.20%

Preferred stock 10.0 10 1.00

Common equity 13.0 70 9.10

TOTAL 11.30%

Plan B

Debt 6.5% 30% 1.95%

Preferred stock 10.5 10 1.05

Common equity 13.5 60 8.10

TOTAL 11.10%

Plan C

Debt 7.0% 40% 2.80%

Preferred stock 10.7 10 1.07

Common equity 14.2 50 7.10

TOTAL 10.97%

Plan D

Debt 9.0% 50% 4.50%

Preferred stock 11.2 10 1.12

Common equity 16.0 40 6.40

TOTAL 12.02%