Colbyco Industries Company has a target capital structure of 60 percent common equity, 30 percent debt, and 10 percent preferred stock. The cost of retained earnings is 15 percent, and the cost of new equity (external) is 16 percent. Colbyco anticipates having Sh.20 million of new retained earnings available over the coming year. Colbyco can sell Sh.15 million of first-mortgage bonds with an after-tax cost of 9 percent. Its investment bankers feel the company could sell Sh.10 million of debentures with a 9.5 percent after-tax cost. Additional debt would cost 10 percent after tax and be in the form of subordinated debentures. The after-tax cost of preferred stock financing is estimated to be 14 percent. Required: Compute the marginal cost of capital schedule for Colbyco, and determine the break points in the schedule.
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Colbyco Industries Company has a target capital structure of 60 percent common
equity, 30 percent debt, and 10 percent
15 percent, and the
having Sh.20 million of new retained earnings available over the coming year. Colbyco
can sell Sh.15 million of first-mortgage bonds with an after-tax cost of 9 percent. Its
investment bankers feel the company could sell Sh.10 million of debentures with a 9.5
percent after-tax cost. Additional debt would cost 10 percent after tax and be in the form
of subordinated debentures. The after-tax cost of preferred stock financing is estimated to
be 14 percent.
Required:
Compute the marginal cost of capital schedule for Colbyco, and determine the break
points in the schedule.
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