What is the firm's marginal cost of capital at each of the following total investment levels? i. Total investment level of $380 million? ii. Total investment level of $199 million? iii. Total investment level of $69 million?

What is the firm's marginal cost of capital at each of the following total investment levels? i. Total investment level of $380 million? ii. Total investment level of $199 million? iii. Total investment level of $69 million?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 4P

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Question

100%

Marginal Incorporated (MI) has determined that its before-tax cost of debt is 7% for the first $112 million in bonds it issues, and 8% for any bonds issued above $112 million. Its cost of preferred stock is 10%.
Its cost of internal equity is 14%, and its cost of external equity is 17%. Currently, the firm's capital structure has $400 million of debt, $100 million of preferred stock, and $500 million of common equity. The firm's marginal tax rate is 30%. The firm is currently making projections for next period. Its managers have determined that the firm should have $59 million available from retained earnings for investment purposes next period. What is the firm's marginal cost of capital at each of the following total investment levels?

i. Total investment level of $380 million?

ii. Total investment level of $199 million?

iii. Total investment level of $69 million?

Definition Definition Type of stock which is granted priority over dividend distributions as compared to common stockholders. Preferred stocks also do not carry any voting rights. Notably, in a case where a company is going to be liquidated, preferred stockholders have a priority claim on the value of assets of the company as quoted in the balance sheet, as compared to the common stockholders.

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