Week 5 Medical Research Corporation Problem

Week 5 Medical Research Corporation Problem - Marginal Cost...

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Project Expected Return Common Stock Underwriting Costs Rate of Growth Yield (Y) A 18% $25 $3 $0.90 11% 11% B 14% C 11.80% D 10.90% Retained Earnings 60% of Financing $15,000,000 Amount of Financing Marginal Cost of Capital 0-$25 million 11.84% $20,000,000 bonds sold to yield 11% $25 - $45 million 12.13% additional debt 2% Over $45 million 12.69% sold to yield 13% Tax Rate 30% Debt 40% A. Y(1-t) Cost Weights Weighted Cost 7.70% 11%*(1-0.3) 7.70% 40% 3.08% 14.600% 60% 8.76% 11.84% 14.600% (.90 / 25) + 11% This is the weighted cost for $0.00 to $25,000,000. B. Run out of Retained Earnings $25,000,000.0 Cost Weights Weighted Cost C. 15.1% 7.70% 40% 3.08% 7.70% 15.091% 60% 9.05% 12.13% This is the weighted cost for $25 million - $45 million D. Debt to increase after $45,000,000 Cost Weights Weighted Cost E. 15.1% 9.10% 40% 3.64% 9.10% 15.091% 60% 9.05% 12.69% Y(1-t) This is the weighted cost for over $45 million 9.10% 13%*(1-0.3) F. The firm should use a capital budget of $45 million because after this amount the debt starts to raise up. Amount of Financing
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Unformatted text preview: Marginal Cost of Capital 0-$25 million 11.84% $25 - $45 million 12.13% Over $45 million 12.69%Higher Costs G. Amount of Financing Marginal Cost of Capital 0-$25 million 11.84% $25 - $45 million 12.13% Over $45 million 12.69%Higher Costs Project Percent Amount of Capital (Millions) A 18% 25 B 14% 50 C 11.80% 75 D 10.90% 100 Dividend D 1 K d = Debt ….K d Common Equity K e K e = (D 1 / P ) + g Weighted Average Cost of Capiltal K a New Common Stock (K n ) Debt ….K d Cost of Debt (K d ) New Common Equity K n New Marginal Cost of Capital K mc New Common Stock (K n ) Debt ….K d (Higher Cost - Increase in Yield 2%) Higher Cost of Debt (K d ) New Common Equity K n New Marginal Cost of Capital K mc Higher Cost of Debt K d = 25 50 75 100 A B C D 0% 5% 10% 15% 20% A 25 B 50 C 75 D 100 A 25 B 50 C 75 Medical Research Corporation Column C Column C Amount of Capital (In Millions)...
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This note was uploaded on 02/25/2012 for the course FINANCE 410 taught by Professor Conway during the Spring '12 term at Regis University.

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