Question

25 value: 2.00 points The Nolan Corporation finds it is necessary to detemine ts marginal cost of capital. Nolan's curent captal stnucture calls 1or 35 percent debt, 25 percent preterred stock, and 40 percent common equity. Initialy, common equity slock (Kl The costs of the various sources of financing are as folows: debt, 8.6 percent; preferred stock, 8 percent; retained earnings, 14 percent; and new common stock, 15.2 percent l be in form of retained eernings (Ka) and hen new common 1. What is the initial waighted avarage cast of captal? (indude debi, praterrod stock, and oommon quty in the form of ratained aarnings, Ke) (Do not round intermediate calculations. Input your answors as a porcent rounded to 2 decimal places.) Weighted Cost Dept Pratarred Woiohtod a capital only b. Il the lim has $16 milion in retained earnincs, at what size capital sructure wil the lim run qut of recained eamings? (Enter vour answer in millions of dollars (e.a. $10 million should be entered "10").) Captal structure sze (X) milion sa percent rounded to 2 decimal places. What il the marginal cosi of capital be immediately alter that point? (Equity I remain at d0 nercent of the carital stnucure but will l be in the form of new common stock, Kp) (Do not round intermed iate calculations. Input your answer Marginal cost of |сapial 10.2 percent, At what size caoital stoacture d The 8.6 peroant cost of debt refemed to earler apples oniy to the first $28 milion of debt Atter that the cost ot debt will l there be a change in the cost of debe? (Enter your answer in millions of dollars (e.g $10 million should be entered Capral sructure imilion il the marginal cost of capital be immediately after that point? (Cansider the facts in bath parts c and d) (Do not round intermediate calculations. Input your answer . What s a percent rounded 2 decimal places.) Mar This is a numerdc celt во pleaвe eгer

Answer 1

Answer:

Answer:A)
					Cost	Weights	Weighted
(aftertax)	Cost
Debt (Kd)	8.60	35%	3.01
Preferred stock (Kp)	8	25%	2.00
Common equity (Ke) (retained earnings)	14	40%	5.60
Weighted average cost of capital (Ka)			10.61
Answer:B)
capital structure=Retained Earnings/ % of Retained Earnings in the capital structure
X= $16 million / .40
X= 40 million
Answer:C)
					Cost	Weights	Weighted
(aftertax)	Cost
Debt (Kd)	8.60	35%	3.01
Preferred stock (Kp)	8.00	25%	2.00
Common equity (Ke) (retained earnings)	15.2	40%	6.08
Weighted average cost of capital (Ka)			11.09
Answer:D)
Capital structure=Amount of lower cost of debt/ % of Debt in the capital structure
X= $28 million / .35
X= 80 million
Answer:E)
					Cost	Weights	Weighted
(aftertax)	Cost
Debt (Kd)	10.20	35%	3.57
Preferred stock (Kp)	8.00	25%	2.00
Common equity (Ke) (retained earnings)	15.2	40%	6.08
Weighted average cost of capital (Ka)			11.65