Question

The White Corporation has a capital structure of 60 percent common equity, 10 percent preferred stock, and 30 percent debt. This capital structure is believed to be optimal. To finance expansion plans over the coming year, the firm expects to have $40 million in retained earnings available. The cost of retained earnings is 18 percent. Additional common equity can be obtained by selling new common stock at a cost of 19.6 percent. Preferred stock can be sold at a cost of 15 percent. $25 million in secured bonds can be sold at a pretax cost of 14 percent. Beyond $25 million, the firm would have to sell unsecured bonds (debentures) at a pretax cost of 15 percent. The firm's tax rate is 21 percent
1. What is the firm's lowest weighted cost of capital?
a. 14.82%
b. 16.50%
c. 11.94%
d. 15.78%
e. 15.0%

2. What is the firm's highest weighted cost of capital?
a. 14.82%
b. 17.76%
c. 16.5%
d. 15.96%
e. 16.5%

Answer 1

Answer:

What is the firm's lowest weighted cost of capital?

Kd=kd(1-tax)

Kd=0.14(1-0.4)=0.084

Kd=0.15(1-0.4)=0.09

(0.60.18)+(0.10.15)+(0.3*0.084)=14.82%

A. 14.82%

What is the firm's highest weighted cost of capital?

(0.60.196)+(0.10.15)+(0.3*0.09)=15.96%

D. 15.96%

Explanation: