Reference no: EM132955415
Question - The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan's current capital structure calls for 35 percent debt, 10 percent preferred stock, and 55 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 (after-tax), 5.6 percent; preferred stock, 11 percent; retained earnings, 8 percent; and new common stock, 9.2 percent.
a. What is the initial weighted average cost of capital?
b. If the firm has $11 million in retained earnings, at what size capital structure will the firm run out of retained earnings?
c. What will the marginal cost of capital be immediately after that point?
d. The 5.6 percent cost of debt referred to earlier applies only to the first $14 million of debt. After that, the cost of debt will be 7.6 percent. At what size capital structure will there be a change in the cost of debt?
e. What will the marginal cost of capital be immediately after that point?
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