Reference no: EM132468014
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 and then new common stock. The costs of the various sources of financing are as follows:
Debt7.6% Preferred stock 7.0% Retained earnings 13.0% New common stock14.2%
a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings.)
b. If the firm has $14 million in retained earnings, at what size of investment will the firm run out of retained earnings?
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.)
d. The7.6 percent cost of debt referred to above applies only to the first $21 million of debt. After that the cost will be 9.2 percent. At what size of investment will there be a change in the cost of debt?
e. What will the marginal cost of capital be immediately after that point? (Consider the facts in both parts c and