Colbyco Industries Company has a target capital structure of 60 percent common equity, 30 percent debt, and 10 percent preferred stock. The cost of retained earnings is 15 percent, and the cost of new equity (external) is 16 percent. Colbyco anticipates having Sh.20 million of new retained earnings available over the coming year. Colbyco can sell Sh.15 million of first-mortgage bonds with an after-tax cost of 9 percent. Its investment bankers feel the company could sell Sh.10 million of debentures with a 9.5 percent after-tax cost. Additional debt would cost 10 percent after tax and be in the form of subordinated debentures. The after-tax cost of preferred stock financing is estimated to be 14 percent. Required: Compute the marginal cost of capital schedule for Colbyco, and determine the break points in the schedule.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
icon
Concept explainers
Question

Colbyco Industries Company has a target capital structure of 60 percent common
equity, 30 percent debt, and 10 percent preferred stock. The cost of retained earnings is
15 percent, and the cost of new equity (external) is 16 percent. Colbyco anticipates
having Sh.20 million of new retained earnings available over the coming year. Colbyco
can sell Sh.15 million of first-mortgage bonds with an after-tax cost of 9 percent. Its
investment bankers feel the company could sell Sh.10 million of debentures with a 9.5
percent after-tax cost. Additional debt would cost 10 percent after tax and be in the form
of subordinated debentures. The after-tax cost of preferred stock financing is estimated to
be 14 percent.
Required:
Compute the marginal cost of capital schedule for Colbyco, and determine the break
points in the schedule.

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 7 steps with 7 images

Blurred answer
Knowledge Booster
Cost of Capital
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education