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Colbyco Industries has a target capital structure of 70 percent common equity, 10 percent debt, and 20 percent preferred
Posted: Wed Jul 06, 2022 6:43 pm
by answerhappygod
- Colbyco Industries Has A Target Capital Structure Of 70 Percent Common Equity 10 Percent Debt And 20 Percent Preferred 1 (34.18 KiB) Viewed 13 times
- Colbyco Industries Has A Target Capital Structure Of 70 Percent Common Equity 10 Percent Debt And 20 Percent Preferred 2 (20.72 KiB) Viewed 13 times
Colbyco Industries has a target capital structure of 70 percent common equity, 10 percent debt, and 20 percent preferred stock. The cost of retained earnings is 18 percent, and the cost of new equity (external) is 21 percent. Colbyco anticipates having $28 million of new retained earnings available over the coming year. Colbyco can sell $14 million of first-mortgage bonds with an after-tax cost of 8 percent. Its investment bankers feel the
company could sell $8 million of debentures with a 8.5 percent after-tax cost. Additional debt would cost 9.5 percent after tax and be in the form of subordinated debentures. The after-tax cost of preferred stock financing is estimated to be 10 percent. Compute the marginal cost of capital schedule for Colbyco, and determine the break points in the schedule. Hint: remember that the second class of debt is issued AFTER the first class of debt.
Break point $ tA $ $ Additional funds Weighted marginal cost of capital % % % %