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that its before-tax cost of debt is 9.0%. Its cost of preferred stock is 13.0%. Its cost of internal equity is 17.0%, and its cost of external equity is 22.0%. Currently, the firm's capital structure has $310 million of debt, $60 million of preferred stock, and $130 million of common equity. The firm's marginal tax rate is 45%. The firm is currently making projections for the next period. Its managers have determined that the firm should have $97 million available from retained earnings for investment purposes next period. What is the firm's marginal cost of capital at a total investment level of $269 million

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abiolataiwo2015

Answer:

9.05%

Explanation:

Calculation to determine the firm's marginal cost of capital at a total investment level of $269 million

Capital Budget = $269 million

To be financed through Equity = 269 million*130/(310+60+130)

To be financed through Equity = 269 million*130/500

To be financed through Equity = 69.9 million

Available from retained earnings = $97 million

Hence, No external equity will be required

Now let calculate the the firm's marginal cost of capital using this formula

WACC = Cost of debt*Weight of Debt + Cost of Preferred Stock*Weight of Preferred Stock + Cost of Equity*Weight of Equity

Let plug in the formula

WACC= 9%(1-45%)*310/500 + 13%*60/500 + 22%*130/500

WACC= 9%(55%)*310/500 + 13%*60/500 + 17%*130/500

WACC=.03069+.0156+.0442

WACC=0.09049*100

WACC=9.049%

WACC=9.05%(Appropriately)

Therefore the firm's marginal cost of capital at a total investment level of $269 million is 9.05%

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