*PLEASE SHOW FORMULAS*

B D E F G M 6 Given: 7 8 9 10 Optimal Capital Structure: 25% Debt 10% Preferred Equity 65% Common Equity Net income for the coming year: $4,000,000 Use Retained Earnings for common equity until completely exhausted for that year (don't spend previous year's RE). Dividends policy is to distribute 60% of annual Nl as dividends. Current RE are 0. 30% Tax rate 11 12 13 14 15 16 Borrowing Limits and Interest Rates: 17 Amount Borrowed O to $400,000 over $400,000 Interest Rate 89 12% 18 19 20 Common Stock price: Do: g: Float: 21 $60 Preferred Stock price: $5 for the coming year Do: 7% 8% $36 $4 for the coming year 22 23 24 25 a. Component costs of capital: 26 27 28 29 After-tax cost of debt, ATK (1) After-tax cost of debt, ATK (2) Cost of Preferred Stock, rp Cost of existing equity (RE), TRE Cost of new equity, IN per AT ra = BT kd(1-TR) up to $400,000 borrowed per AT rs = BT kd(1-TR) if over $400,000 borrowed per the dividend growth model per the dividend growth model per the dividend growth model 30 31 32 33 b. MCC break points: 34 35 Debt break point: based on 25% debt financing 36 37 38 Equity break point: Net Income Dividends RE available Break point = based on 65% common equity financing 39 40 41 42 C. MCC figures, using higher rates for equity and debt when past break point: 43 44 45 WACC up to 1st break point: Marginal CC between 1st & 2nd break points: Marginal CC after 2nd break point: Uses higher costs of debt Uses higher costs of capital 46 B D E F G M 6 Given: 7 8 9 10 Optimal Capital Structure: 25% Debt 10% Preferred Equity 65% Common Equity Net income for the coming year: $4,000,000 Use Retained Earnings for common equity until completely exhausted for that year (don't spend previous year's RE). Dividends policy is to distribute 60% of annual Nl as dividends. Current RE are 0. 30% Tax rate 11 12 13 14 15 16 Borrowing Limits and Interest Rates: 17 Amount Borrowed O to $400,000 over $400,000 Interest Rate 89 12% 18 19 20 Common Stock price: Do: g: Float: 21 $60 Preferred Stock price: $5 for the coming year Do: 7% 8% $36 $4 for the coming year 22 23 24 25 a. Component costs of capital: 26 27 28 29 After-tax cost of debt, ATK (1) After-tax cost of debt, ATK (2) Cost of Preferred Stock, rp Cost of existing equity (RE), TRE Cost of new equity, IN per AT ra = BT kd(1-TR) up to $400,000 borrowed per AT rs = BT kd(1-TR) if over $400,000 borrowed per the dividend growth model per the dividend growth model per the dividend growth model 30 31 32 33 b. MCC break points: 34 35 Debt break point: based on 25% debt financing 36 37 38 Equity break point: Net Income Dividends RE available Break point = based on 65% common equity financing 39 40 41 42 C. MCC figures, using higher rates for equity and debt when past break point: 43 44 45 WACC up to 1st break point: Marginal CC between 1st & 2nd break points: Marginal CC after 2nd break point: Uses higher costs of debt Uses higher costs of capital 46