Finance for Life
Integrative—WACC, WMCC, and IOS. Cartwell Products has compiled the data shown in the following table for the current costs of its three basic sources of capital—long-term debt, preferred stock, and common stock equity—for various ranges of new financing.
Source of Capital Range of New Financing After Tax Cost
Long-term debt $0 to 320,000 6% $320,000 and above 8%
Preferred stock $0 and above 17%
Common stock equity $0 to $200,000 20% $200,000 and above 24%
The company's capital structure weights used in calculating its weighted average cost of capital are shown in the following table.
Source of Capital Weight
Long-term debt 40%
Preferred Stock 20
Common Stock 40
Total 100%
a. Determine the breaking points and ranges of total new financing associated with each source of capital.
b. Using the data developed in a, determine the breaking points (levels of total new financing) at which the firm's weighted average cost of capital will change.
c. Calculate the weighted average cost of capital for each range of total new financing found in b. (Hint: There are three ranges.)
d. Using the results of c, along with the following information on the available investment opportunities, draw the firm's weighted marginal costs of capital (WMCC) schedule and investment opportunities schedule (IOS) on the same set of total new financing or investment (x axis)-weighted average cost of capital and IRR (y axis) axes.
Investment Internal rate of Initial Opportunity Return (IRR) Investment
A 19% $200,000 B 15 300,000 C 22 100,000 D 14 600,000 E 23 200,000 F 13 100,000 G 21 300,000 H 17 100,000 I 16 400,000
e. Which, it any, of the available investments do you recommend that the firm accept? Explain your answer.
Calculation of specific costs, WACC, and WMCC. Lang Enterprises is interested in measuring
Source of Capital Range of New Financing After Tax Cost
Long-term debt $0 to 320,000 6% $320,000 and above 8%
Preferred stock $0 and above 17%
Common stock equity $0 to $200,000 20% $200,000 and above 24%
The company's capital structure weights used in calculating its weighted average cost of capital are shown in the following table.
Source of Capital Weight
Long-term debt 40%
Preferred Stock 20
Common Stock 40
Total 100%
a. Determine the breaking points and ranges of total new financing associated with each source of capital.
b. Using the data developed in a, determine the breaking points (levels of total new financing) at which the firm's weighted average cost of capital will change.
c. Calculate the weighted average cost of capital for each range of total new financing found in b. (Hint: There are three ranges.)
d. Using the results of c, along with the following information on the available investment opportunities, draw the firm's weighted marginal costs of capital (WMCC) schedule and investment opportunities schedule (IOS) on the same set of total new financing or investment (x axis)-weighted average cost of capital and IRR (y axis) axes.
Investment Internal rate of Initial Opportunity Return (IRR) Investment
A 19% $200,000 B 15 300,000 C 22 100,000 D 14 600,000 E 23 200,000 F 13 100,000 G 21 300,000 H 17 100,000 I 16 400,000
e. Which, it any, of the available investments do you recommend that the firm accept? Explain your answer.
Calculation of specific costs, WACC, and WMCC. Lang Enterprises is interested in measuring