Answer Happy

The McGee Corporation finds it is necessary to determine its
marginal cost of capital. McGee’s current capital structure calls
for 40 percent debt, 10 percent preferred stock, and 50 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 (after-tax), 4.0 percent; preferred
stock, 5.0 percent; retained earnings, 12.0 percent; and new common
stock, 13.2 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 $26.5 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").)
c. What will the marginal cost of capital be
immediately after that point? (Equity will remain at 50 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.)
d. The 4.0 percent cost of debt referred to
above applies only to the first $44 million of debt. After that,
the cost of debt will be 9.2 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").)
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.)