The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan's current capital structure calls for 35 percent debt, 25 percent preferred stock, and 40 percent common equity. Initially, common equity will be in the form of retained earnings (K) and then new common stock (K,). The costs of the various sources of financing are as follows: debt (after-tax), 6.2 percent; preferred stock, 8 percent; retained earnings, 11 percent; and new common stock, 12.2 percent. a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, Ke) (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt % Preferred stock Common equity Weighted average cost of capital 0.00 % b. If the firm has $28 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)
The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan's current capital structure calls for 35 percent debt, 25 percent preferred stock, and 40 percent common equity. Initially, common equity will be in the form of retained earnings (K) and then new common stock (K,). The costs of the various sources of financing are as follows: debt (after-tax), 6.2 percent; preferred stock, 8 percent; retained earnings, 11 percent; and new common stock, 12.2 percent. a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, Ke) (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt % Preferred stock Common equity Weighted average cost of capital 0.00 % b. If the firm has $28 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:**Transcription for Educational Website:**
---
The Nolan Corporation finds it necessary to determine its marginal cost of capital. Nolan’s current capital structure consists of 35 percent debt, 25 percent preferred stock, and 40 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), 6.2 percent; preferred stock, 8 percent; retained earnings, 11 percent; and new common stock, 12.2 percent.
**a. What is the initial weighted average cost of capital?**
(Include debt, preferred stock, and common equity in the form of retained earnings, Ke) **(Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)**
| | Weighted Cost |
|-----------------------------|---------------|
| Debt | % |
| Preferred stock | % |
| Common equity | % |
| Weighted average cost of capital | 0.00 % |
**b. If the firm has $28 million in retained earnings, at what size capital structure will the firm run out of retained earnings?**
(Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)
| Capital structure size (X) | million |
---
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 1 images
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education