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Madison Corporation is planning to expand its business. This expansion may require additional funds but...

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Accounting

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Madison Corporation is planning to expand its business. This expansion may require additional funds but the company wants to maintain its capital structure at a level where the weighted average cost of capital is minimum. The company explores three plans and presents the following information: Equity Debt Preferred Stock Cost (after-tax) 17.5% 8% 11.2% PLAN - A Weights 40% 50% 10% Cost (after-tax) 15% 5.5% 10.5% PLAN - B Weights 60% 30% 10% Cost (after-tax) 15.8% 6.0% 10.7% PLAN-C Weights 50% 40% 10% You are required to: (a) Calculate weighted average cost of capital (WACC) under all three plans. (3 Marks) (b) Advise which plan seems to be an appropriate or optimal capital structure and why? (2 Marks) (c) Briefly discuss the results under Plan-A and Plan-C. (1 Mark)

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