Marginal cost of capital be immediately after that point

Assignment Help Financial Management
Reference no: EM131301079

The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee’s current capital structure calls for 40 percent debt, 5 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, 5.2 percent; preferred stock, 8.0 percent; retained earnings, 10.0 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.)

b. If the firm has $38.5 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 sixe (X)_____million

c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 55 percent of the capital structure, but will all be in the form of new common stock, Kn.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Marginal cost of capital____%

d. The 5.2 percent cost of debt referred to above applies only to the first $22 million of debt. After that, the cost of debt will be 7.2 percent. At what size capital structure will there be a change in the cost of debt? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").

Capital structure size (Z)_____million

e. What will the marginal cost of capital be immediately after that point? (Consider the facts in both parts c and d.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Margin cost of capital__%

Reference no: EM131301079

Questions Cloud

Application-critical thinking in action project : Thus far in the formulation of your argument, you have analyzed claims and evidence. Left alone, these statements have little significance. This week, you have explored how to breathe life into these statements by making inferences and assumptions
What do you think would the futures price of hundred shares : What do you think would the futures price of 100 shares of your reference company to be delivered to you in one year be right now?
Organization system archetypes : For the fifth section of your Term Project you are to write a 3 page paper, APA formatted. The paper will include an effective Introduction and Conclusion.
Retire be plan at retirement : Quanisha has just become eligible to participate in her company's retirement plan. Her company does not match contributions, but the plan does average an annual return of 12 percent. Quanisha is 40 and plans to work to age 65. If she contributed $200..
Marginal cost of capital be immediately after that point : The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee’s current capital structure calls for 40 percent debt, 5 percent preferred stock, and 55 percent common equity. What is the initial weighted average cost of ..
Two announcements concerning its common stock : Angelina's made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $2.20 a share. Secondly, the company announced that all future dividends will increase by 5% annually. Wha..
Explain why mutual fund investment may be overdiversified : Walt Davies and Shane O’Brien are district managers for Lee, Inc. Over the years, as they moved through the firm’s sales organization, they became (and still remain) close friends.Analyze Walt’s argument and explain why a mutual fund investment may b..
Dividends are expected to grow at a rate : Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 8 percent thereafter. If the required return is 11 percent, and the company just paid a di..

Reviews

Write a Review

 

Financial Management Questions & Answers

  Currently the stock is selling

Currently the stock is selling for $38.25. A call to buy the stock at $40 is selling for $3.38 and a put to sell the stock at $35 is selling for 1.94. How could you use a collar to reduce your risk of loss from a decline in the price of the stock?

  Compute the delta of given portfolio

Compute the option prices C1, P2 on that date.-  Compute the Delta (?) of this portfolio. -  Compute the Gamma (Γ) of this portfolio.

  What is the price today for a bacon signs bond

Ten years ago Bacon Signs Inc. issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each.-  What is the price today for a Bacon Signs bond.

  The present value of an ordinary annuity

Complete the following for the present value of an ordinary annuity. Do not round intermediate calculations. Round answer to nearest cent. Amount of annuity expected $900 payment annually for 4 years at an interest rate of 6% what is the present valu..

  What annual rate of return must the fund portfolio

You are considering an investment in a mutual fund with a 4% front-end load and an expense ratio of 0.65%. You can invest instead in a bank CD paying 6% interest. Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of 0.90% per..

  What is the future value of this prize if each payment

The Florida lottery agrees to pay the winner $259,000 at the end of each year for the next 20 years. What is the future value of this prize if each payment is put in an account earning 0.07?

  Calculate earnings per share and EPS

Kaelea, Inc., has no debt outstanding and a total market value of $74,000. Earnings before interest and taxes, EBIT, are projected to be $8,100 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 21 perce..

  Investment in one-year zero-coupon bonds

A pension plan is obligated to make disbursements of $1 million, $2 million, and $1 million at the end of each of the next three years, respectively. Investment in one-year zero-coupon bonds. Investment in one-year zero-coupon bonds. Investment in pe..

  Under writers have informed the firms management

The beranek company whose stock price in now $25 need to raise $20 million in common stock. Under writers have informed the firms management that they must price the new issue to the public at $22 per share because of signaling effects. How many shar..

  What risk free rate supports this cost of equity

You have just computed the Beta of a stock to be 1.5 and the estimate the expected market return next period is 7.3333%. The estimated cost of equity is 16%. With an estimated long run market risk premium of 8.0%, what risk free rate supports this co..

  What was its charge for depreciation and amortization

Pearson Brothers recently reported an EBITDA of $4.5 million and net income of $0.7 million. It had $2.0 million of interest expense, and its corporate tax rate was 30%. What was its charge for depreciation and amortization? Write out your answer com..

  Equipment is depreciated straight-line to a zero book value

Thornley Machines is considering a 3-year project with an initial cost of $1,080,000. The project will not directly produce any sales but will reduce operating costs by $640,000 a year. The equipment is depreciated straight-line to a zero book value ..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd