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Question - (cost of capital - schedule - one break point) A company plans to raise new capital as follows:
Cost Proportion
Bonds payable 9.0% 35%
Preferred stock 15.5% 15
Common stock (retained earnings) 17.5 50
Total liabilities + equity 42% 100%
The firm forecasts it can retain $1 million of new earnings. If it requires additional common equity, it will sell a new issue of common stock at a cost of 18.5%.
Required -
a. Calculate the company's WACC using new retained earnings at the equity source.
b. Locate the break point in the cost of capital schedule due to running out of new retained earnings.
c. Calculate the company's WACC after it substitutes the new stock issue for retained earnings.
d. Draw the cost of capital schedule.
Financial Statement Analysis and Preparation
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