A firm wishes to raise funds in the following proportions: 20 percent debt, 20 percent P/S, and 60 percent CE (common equity). Assume the cost of internally generated funds is 15 percent. Annual after-tax cost of debt is 5.86%. Cost of preferred equity is 6.12%. It believes all of the CE component can be raised using internally generated funds.
a. Find the WACC.
b. Now suppose the firm wants to raise $10 million for investment purposes, and it has only $4 million of internally generated funds available. Determine the “break point” of the CE component. Break point is the maximum investment in which all targeted equity can be financed internally.
c. Determine the marginal cost of capital (MCC) if the firm must raise funds beyond the break point. Assume the cost of new common equity issues is 20 percent.