ABC company has compiled the data for the current cost of basic sources of capital i.e. long term debt, preferred stock

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Abc Company Has Compiled The Data For The Current Cost Of Basic Sources Of Capital I E Long Term Debt Preferred Stock 1 (48.96 KiB) Viewed 44 times

ABC company has compiled the data for the current cost of basic sources of capital i.e. long term debt, preferred stock and common stock equity Sources of capital Range of new financing After tax cost Long term deht 0-400,000 6% 400.000 and above 8% Preferred stock 0 and above 10% Common stock 0-300,000 20% 300,000- and above 22% The company's capital structure weights used in the calculating the weighted average cost of capital are shown in the following table Source of capital Weight Long term debt 40% Preferred stock 20% Common stock equity 40% Requirements: a. Determine the break points and ranges of total now financing associated with each source of capital b. Using the data developed in part a, determine the break points (levels of total new financing) at which the form weighted average cost of capital will change. e Calculate the weighted average cost of capital for each range of total new financing found in part b. (Hint: There are three rangtes.) d. Using the results of parts, along with the following information on the avail able investment opportunities, draw the firm's weighted marginal cost of cap. ital (WMCC) schedule and investment opportunities schedule (TOS) on the same set of axes (total new financing or investment on the x axis and weighted average cost of capital and IRR on the yaxis Initial Intervalo RR 19% 13 22 C D . F G $200,000 100,000 100,000 400.000 200.000 100.000 100.000 100.000 400 21 e. Which of any of the available investments do you recommend that the firm accept? Explain your answer.