Suppose that TRM Consulting Services has discussed its need for capital with its investment bankers. The bankers
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Suppose that TRM Consulting Services has discussed its need for capital with its investment bankers. The bankers have estimated that TRM can raise new funds in the capital markets under the following conditions:
a. Using the information from the previous problem, calculate each of the breakpoints, including the break-point due to retained earnings.
b. Create a chart of TRM’s marginal WACC curve using the market-value weights. Make sure that it is a perfect step function.
Transcribed Image Text:
Source Retained Earnings Common Equity Preferred Equity Debt Range Up to 150,000 Up to 1,000,000 1,000,001 to 3,000,000 More than 3,000,000 Up to 200,000 More than 200,000 Up to 1,000,000 1,000,001 to 2,000,000 More than 2,000,000 After-Tax Cost 10.50% 11.12% 11.36% 11.85% 8.33% 9.00% 5.37% 5.90% 6.25%
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To calculate each of the breakpoints including the breakpoint due to retained earnings we need to identify the points at which the weighted average co...View the full answer
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