The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan’s current...

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The Nolan Corporation finds it is necessary to determine itsmarginal cost of capital. Nolan’s current capital structure callsfor 40 percent debt, 10 percent preferred stock, and 50 percentcommon equity. Initially, common equity will be in the form ofretained earnings (Ke) and then new common stock (Kn). The costs ofthe various sources of financing are as follows: debt, 6.6 percent;preferred stock, 6 percent; retained earnings, 11 percent; and newcommon stock, 12.2 percent.
a. What is the initial weighted average cost ofcapital? (Include debt, preferred stock, and common equity in theform of retained earnings, K_e.) (Do notround intermediate calculations. Input your answers as a percentrounded to 2 decimal places.)
b. If the firm has $10million in retained earnings, at what size capital structure willthe firm run out of retained earnings? (Enter your answerin millions of dollars (e.g., $10 million should be entered as"10").)
c. What will the marginal cost of capital beimmediately after that point? (Equity will remain at 50 percent ofthe capital structure, but will all be in the form of new commonstock, K_n.) (Do not round intermediatecalculations. Input your answer as a percent rounded to 2 decimalplaces.)
d. The 6.6 percent cost of debt referred toearlier applies only to the first $20 million of debt. After that,the cost of debt will be 8.2 percent. At what size capitalstructure will there be a change in the cost of debt?(Enter your answer in millions of dollars (e.g., $10million should be entered as "10").)
e. What will the marginal cost of capital beimmediately after that point? (Consider the facts in both partsc and d.) (Do not round intermediatecalculations. Input your answer as a percent rounded to 2 decimalplaces.)

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a Weight of debt 40 Weight of preferred stock 10 Weight of common equity in form of retained earnings 50 Cost of debt 66 Cost of preferred stock 6 and cost of retained earnings 11 Initial Weighted average cost of capital Weight of debt x Cost of debt Weight of preferred stock x Cost of preferred stock Weight of common equity in form of retained earnings x cost of retained earnings 40 x 66 10 x 6 50 x 11 264 060 550 874 Hence Initial weighted average cost of capital 874 b Amount of retained earnings 10 million See Answer

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The Nolan Corporation finds it is necessary to determine itsmarginal cost of capital. Nolan’s current capital structure callsfor 40 percent debt, 10 percent preferred stock, and 50 percentcommon equity. Initially, common equity will be in the form ofretained earnings (Ke) and then new common stock (Kn). The costs ofthe various sources of financing are as follows: debt, 6.6 percent;preferred stock, 6 percent; retained earnings, 11 percent; and newcommon stock, 12.2 percent.a. What is the initial weighted average cost ofcapital? (Include debt, preferred stock, and common equity in theform of retained earnings, Ke.) (Do notround intermediate calculations. Input your answers as a percentrounded to 2 decimal places.) b. If the firm has $10million in retained earnings, at what size capital structure willthe firm run out of retained earnings? (Enter your answerin millions of dollars (e.g., $10 million should be entered as"10").)c. What will the marginal cost of capital beimmediately after that point? (Equity will remain at 50 percent ofthe capital structure, but will all be in the form of new commonstock, Kn.) (Do not round intermediatecalculations. Input your answer as a percent rounded to 2 decimalplaces.) d. The 6.6 percent cost of debt referred toearlier applies only to the first $20 million of debt. After that,the cost of debt will be 8.2 percent. At what size capitalstructure will there be a change in the cost of debt?(Enter your answer in millions of dollars (e.g., $10million should be entered as "10").)e. What will the marginal cost of capital beimmediately after that point? (Consider the facts in both partsc and d.) (Do not round intermediatecalculations. Input your answer as a percent rounded to 2 decimalplaces.)