Reference no: EM132412435

The Nolan Corporation finds that it is necessary to determine its marginal cost of capital. Nolan?s current capital structure calls for 30 percent debt, 20 percent preferred stock, and 50 percent common equity. Initially common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt, 9.2 percent; preferred stock, 8 percent; retained earning, 9 percent; and new common stock, 10.2 percent.

(a) What is the initial weighted average cost of capital? (Round your intermediate calculations and final answer to 2 decimal places. Omit the "%" sign in your response.) Weighted average cost of capital %

(b) If the firm has $31 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions. Omit the "tiny_mce_markerquot; sign in your response.) Capital structure size (X) $ million

(c) What will the marginal cost of capital be immediately after that point? (Equity will remain at 50 percent of the capital structure, but will all be in the form of new common stock, Kn.)(Round your intermediate calculations and final answer to 2 decimal places. Omit the "%" sign in your response.) Marginal cost of capital %

(d) The 9.2 percent cost of debt referred to above applies only to the first $9 million of debt. After that the cost of debt will be 11.2 percent. At what size capital structure will there be a change in the cost of debt? (Enter your answer in millions. Omit the "tiny_mce_markerquot; sign in your response.) Capital structure size (Z) $ million

(e) What will the marginal cost of capital be immediately after that point? (Consider the facts in both parts c and d.) (Round your intermediate calculations and final answer to 2 decimal places. Omit the "%" sign in your response.) Marginal cost of capital %