None The Nolan Corporation finds that it is necessary to determine itsmarginal cost of capital. Nolan's current capital structure calls for 35percent debt, 20 percent preferred stock, and 45 percent commonequity. Initially, common equity will be in the form of retained earnings(Ke) and then new common stock (Kn). The costs of the varioussources of financing are as follows: debt, 9.5 percent; preferred stock, 7percent; retained earnings, 15 percent; and new common stock, 12.2percent.The 9.5 percent cost of debt referred to above applies only to the first$21 million of debt. After that the cost of debt will be 11.5 percent. Atwhat size capital structure will there be a change in the cost of debt?

To determine the size of the capital structure at which the cost of debt changes, we use the target…

Answered: The Nolan Corporation finds that it is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 5P

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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…
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 (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt (after-tax), 8.6 percent; preferred stock, 8 percent; retained earnings, 14 percent; and new common stock, 15.2 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.) b. If the firm has $16 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").) c. What will the marginal cost of…
The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee's current capital structure calls for 45 percent debt, 25 percent preferred stock, and 30 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), 4.0 percent; preferred stock, 5.0 percent; retained earnings, 13.0 percent; and new common stock, 14.4 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.) Debt Preferred stock Common equity Weighted average cost of capital Weighted Cost % Capital structure size (X) b. If the firm has $31.5 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter…
The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee’s current capital structure calls for 50 percent debt, 20 percent preferred stock, and 30 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), 6.0 percent; preferred stock, 8.0 percent; retained earnings, 9.0 percent; and new common stock, 10.2 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 %
The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee’s current capital structure calls for 50 percent debt, 20 percent preferred stock, and 30 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), 6.0 percent; preferred stock, 8.0 percent; retained earnings, 9.0 percent; and new common stock, 10.2 percent. subparts B-Epart a was asked in another question b. If the firm has $21.0 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 c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 30 percent of the capital structure, but will all be in the form of new…
The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee's current capital structure calls for 50 percent debt, 25 percent preferred stock, and 25 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), 7.2 percent; preferred stock, 10.0 percent, retained earnings, 12.0 percent; and new common stock, 13.2 percent. a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, K.) Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Preferred stock Common equity Weighted average cost of capital Weighted Cost % Capital structure size (X) b. If the firm has $18.5 million in retained earnings, at what size capital structure will the firm run out of retained earnings? Note:…
GPR is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, GPR would have 178,500 shares of stock outstanding. Under Plan II, there would be 71,400 shares of stock outstanding and $1.79 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes. The projected EBIT is $280,000. Which capital structure plan would you prefer, if you were a shareholder in the firm? Support your response with relevant computations
Ilumina Corp is trying to determine its optimal capital structure. The company’s capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: Percent financed with debt (wd) Percent financed with equity (wc) Debt-to-equity ratio (D/S) After-tax cost of debt (%) 0.25 0.75 0.25/0.75 = 0.33 6.9% 0.35 0.65 0.35/0.65 = 0.5385 7.1% 0.50 0.50 0.50/0.50 = 1.00 8.0% The company uses the CAPM to estimate its cost of common equity, rs. The risk-free rate is 5% and the market risk premium is 6%. Ilumina estimates that its beta with 10% debt is 1. The company’s tax rate, T, is 40%. On the basis of this information, what is the company’s optimal capital structure, and what is the firm’s cost of capital at this optimal capital structure? (Please show work)
Analyze the cost of capital situations of the following company cases, and answer the specific questions that finance professionals need to address. Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. If its rent ta rate is 25%, how much higher will Turnbull's weighted average cost of capital (WACC) be if it has raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? (Note: Round your intermediate calculations to two decimal places.) 1.39% 1.34% 1.07% 0.96%
Aaron Athletics is trying to determine its optimal capital structure. The company’s capital structure consists of debt and common equity. In order to estimate the cost of capital at various debt levels the company has constructed the following table: Percent financed with debt (wD) Percent financed with equity (ws) Before tax cost of debt 0.10 0.90 7.0% 0.20 0.80 7.2% 0.30 0.70 8.0% 0.40 0.60 8.8% 0.50 0.50 9.6% The company uses the CAPM to estimate its cost of equity, rS . The risk-free rate is 4% and the market risk premium is 5%. Aaron estimates that if it had no debt its beta would be 1.0. (It’s unlevered beta equals 1.0). The company’s tax rate is 40%. On the basis of this information, what is the company’s optimal capital structure, and what is the WACC at that capital structure? (Show your calculations at each debt level).
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Seduak has estimated the costs of debt and equity capital for various proportions of debt in its capital structure. % Debt After-tax cost of debt Cost of equity 0% - 13.0% 10 5.4% 13.3 20 5.4 13.8 30 5.8 14.4 40 6.3 15.2 50 7.0 16.0 60 8.2 17.0 Based on these estimates, determine Seduak’s optimal capital structure

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