
Concept explainers
Weighted Average Cost of Capital (WACC) is the required
An optimal capital structure of a company is a mix of debt, equity and preferred stock which can be used to maximize the company’s stock price. Therefore, a target proportion of capital structure and cost of each financing can be used to determine the WACC of the company.
Here,
Proportion of debt in the target capital structure “
Proportion of preferred stock in the target capital structure “
Proportion of equity in the target capital structure “
After tax cost of debt, preferred stock,
Marginal Cost of Capital (MCC) is the weighted average cost of capital for the last dollar raised in new capital. MCC of the company remains constant for some time after which it increases. This depends on the amount of additional capital raised and eventually increases as the cost of raising new capital is higher due to flotation cost. This is mostly evident in case of cost of equity, where first the retained earnings are utilized by the firms to meet their target capital structure and any excess fund required is raised through new equity. So, as new equity is added to the fund, the marginal cost of raising the fund also increases.
The target capital structure for the company is 60% debt, 10% preferred stock and 30% common equity. Marginal tax rate is 30%, with before tax cost of debt, cost of preferred stock, cost of retained earnings and cost of new equity being 5%, 7%, 11% and 13%, respectively. The company generates $27,000 in retained earnings and needs to raise $85,000 in capital.

Want to see the full answer?
Check out a sample textbook solution
Chapter 11 Solutions
CFIN -STUDENT EDITION-ACCESS >CUSTOM<
- Depreciation is:a) The increase in the value of an asset over time.b) The allocation of the cost of a tangible asset over its useful life.c) An amount paid for the maintenance of an asset.d) An asset's market value at the end of the accounting period.arrow_forwardDepreciation is:a) The increase in the value of an asset over time.b) The allocation of the cost of a tangible asset over its useful life.c) An amount paid for the maintenance of an asset.d) An asset's market value at the end of the accounting period. Need helparrow_forwardWhat is the corporate finance how this is the part of finance?arrow_forward
- Explain! Which of the following represents the primary goal of financial management?A) Maximizing net incomeB) Maximizing shareholder wealthC) Minimizing costsD) Maximizing market sharearrow_forwardWhich of the following represents the primary goal of financial management?A) Maximizing net incomeB) Maximizing shareholder wealthC) Minimizing costsD) Maximizing market sharearrow_forwardExplain! Which of the following is an example of a capital budgeting decision?A) Determining how to finance a new projectB) Deciding whether to pay dividends to shareholdersC) Deciding whether to purchase a new piece of equipmentD) Managing the company's cash balancesarrow_forward
- Explain What does a beta coefficient of 1.5 indicate for a stock?A) The stock is less volatile than the marketB) The stock has no correlation with the marketC) The stock is 50% more volatile than the marketD) The stock is 50% less volatile than the marketarrow_forwardWhat does a beta coefficient of 1.5 indicate for a stock?A) The stock is less volatile than the marketB) The stock has no correlation with the marketC) The stock is 50% more volatile than the marketD) The stock is 50% less volatile than the marketarrow_forwardWhat is the formula for calculating the net present value (NPV) of an investment?A) Future Cash Flows × Discount RateB) Present Value of Cash Inflows - Initial InvestmentC) Internal Rate of Return - Discount RateD) Net Income / Initial Investmentarrow_forward
- Which of the following is an example of a capital budgeting decision?A) Determining how to finance a new projectB) Deciding whether to pay dividends to shareholdersC) Deciding whether to purchase a new piece of equipmentD) Managing the company's cash balancesarrow_forwardWhat is the formula for the current ratio?A) Current Assets / Total LiabilitiesB) Current Liabilities / Total AssetsC) Current Assets / Current LiabilitiesD) Total Assets / Current Liabilitiesarrow_forwardWhat is the primary goal of financial management?A) To maximize profitsB) To maximize shareholder wealthC) To minimize costsD) To maximize market sharearrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
