The firm's cost of debt is 8 percent, and the cost of retained earnings is 14 percent. However, if the firm exhausts its retained earnings of $23,678, the cost of equity rises to 14.9 percent. Currently management believes that the firm's current combination of 35 percent debt and 65 percent equity is the optimal capital structure.
a. What is the firm's cost of capital if it uses only retained earnings?

b.What is the firm's cost of capital if it uses new equity?
c. How much total financing may the firm have before the marginal cost of capital rises?

Question

The firm's cost of debt is 8 percent, and the cost of retained earnings is 14 percent. However, if the firm exhausts its retained earnings of $23,678, the cost of equity rises to 14.9 percent. Currently management believes that the firm's current combination of 35 percent debt and 65 percent equity is the optimal capital structure.​
a. What is the firm's cost of capital if it uses only retained earnings?
​
b.What is the firm's cost of capital if it uses new equity?
c. How much total financing may the firm have before the marginal cost of capital rises?

Quizplus · Accepted Answer

The Answer of The firm's cost of debt is 8 percent, and the cost of retained earnings is 14 percent. However, if the firm exhausts its retained earnings of $23,678, the cost of equity rises to 14.9 percent. Currently management believes that the firm's current combination of 35 percent debt and 65 percent equity is the optimal capital structure.​
a. What is the firm's cost of capital if it uses only retained earnings?
​
b.What is the firm's cost of capital if it uses new equity?
c. How much total financing may the firm have before the marginal cost of capital rises?

The Firm's Cost of Debt Is 8 Percent, and the Cost