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Problem - Suppose that TRM Consulting Services has discussed its need for capital with its investment bankers. The bankers have estimated that TRM can raise new funds in the capital markets under the following conditions:
Source
Range
After-Tax Cost
Retained Earnings
Up to 150,000
10.50%
Common Equity
Up to 1,000,000
11.12%
1,000,001 to 3,000,000
11.36%
More than 3,000,000
11.85%
Preferred Equity
Up to 200,000
8.33%
More than 200,000
9.00%
Debt
5.37%
1,000,001 to 2,000,000
5.90%
More than 2,000,000
6.25%
Required -
a. Using the information from the previous problem, calculate each of the break-points, including the break-point due to retained earnings.
b. Create a chart of TRM's marginal WACC curve using the market-value weights. Make sure that it is a perfect step function.
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