*PLEASE SHOW FORMULAS*

Given: 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 Borrowing Limits and Interest Rates: Amount Borrowed O to $400,000 over $400,000 Interest Rate 8% 12% Common Stock price: Do: $60 Preferred Stock price: $5 for the coming year Do: 7% 8% $36 $4 for the coming year Float: a. Component costs of capital: After-tax cost of debt, ATK. (1) After-tax cost of debt, ATK, (2) Cost of Preferred Stock, rp Cost of existing equity (RE), PRE Cost of new equity, IN 5.60% per AT rd = BT kd(1-TR) up to $400,000 borrowed 8.40% per AT ra = BT kd(1-TR) if over $400,000 borrowed per the dividend growth model 15.33% per the dividend growth model per the dividend growth model b. MCC break points: Debt break point: 1,600,000 based on 25% debt financing Equity break point: Net Income_ 4,000,000 Dividends RE available Break point = based on 65% common equity financing = C. MCC figures, using higher rates for equity and debt when past break point: WACC up to 1st break point: Marginal CC between 1st & 2nd break points: Marginal CC after 2nd break point: 1.84% Uses higher costs of debt Uses higher costs of capital Given: 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 Borrowing Limits and Interest Rates: Amount Borrowed O to $400,000 over $400,000 Interest Rate 8% 12% Common Stock price: Do: $60 Preferred Stock price: $5 for the coming year Do: 7% 8% $36 $4 for the coming year Float: a. Component costs of capital: After-tax cost of debt, ATK. (1) After-tax cost of debt, ATK, (2) Cost of Preferred Stock, rp Cost of existing equity (RE), PRE Cost of new equity, IN 5.60% per AT rd = BT kd(1-TR) up to $400,000 borrowed 8.40% per AT ra = BT kd(1-TR) if over $400,000 borrowed per the dividend growth model 15.33% per the dividend growth model per the dividend growth model b. MCC break points: Debt break point: 1,600,000 based on 25% debt financing Equity break point: Net Income_ 4,000,000 Dividends RE available Break point = based on 65% common equity financing = C. MCC figures, using higher rates for equity and debt when past break point: WACC up to 1st break point: Marginal CC between 1st & 2nd break points: Marginal CC after 2nd break point: 1.84% Uses higher costs of debt Uses higher costs of capital