1. Liabilities & EquityAssets Debt Preferred Stock $ Bank 14% Common Stock 5% R.O.I. (cost of $) Total Liabilities = Total Assets & Equity Chapter 10 Cost of Capital

2. Capital Structure $ % Debt $50 50% Preferred 30 30% Common 20 20% Total $100 100%

3. Chapter 10 Cost of Capital Cost of $ $ % k (given) Debt $50 50% 10% Preferred 30 30% 12% Common 20 20% 14% Total $100 100%

4. Chapter 10 Cost of Capital Wt’d Avg Cost Cost of $ of Capital $ % k (given) tax 40% Debt $50 50% 10% 0.5(10%)x(1-tax)=3% Preferred 30 30% 12% 0.3(12%) =3.6% Common 20 20% 14% 0.2(14%) =2.8% Total $100 100% WACC =9.4%

5. (1) Cost of Old Debt (K d ) K d = interest = 10 = 10% principal 100 (2)Cost of Old Preferred Stock (K ps ) K ps = Dividend to P.S. = 12 = 12% P.S. price 100 (3)Cost of Old Common Stock (K s ) K s = D 1 + g = 2 + 4% = 14% P 0 20 K s = Risk Free Rate + Risk Premium

6. For the following example... FLOTATION COST f = Flotation Cost = 5%

7. (1) Cost of New Debt (K d ) K d = interest = 10 = 10.53% principal(1-f) 100(1-.05) (2)Cost of New Preferred Stock (K ps ) K s = Dividend to P.S. = 12 = 12.63% P.S. price (1-f) 100(1-.05) (3)Cost of New Common Stock (K s ) K s = D 1 + g = 2 + 4% = 14.53% P 0 (1-f) 20(1-.05) K s = Risk Free Rate + Risk Premium

8. Chapter 10 Cost of Capital Wt’d Ave. Cost Cost of $ of Capital $ % k (given) & tax @ 40% Debt $50 50% 10.53% 0.5(.1053)x(1-t ax )=3.16% Pref. 30 30% 12.63% 0.3(.1263) =3.79% Comm. 20 20% 14.53% 0.2(.1453) =2.91% Total $100 100% WACC =9.86% Marginal Cost of Capital (MCC) = 9.86%

9. Percent a = 16% b = 14% c = 12% d = 8% IOS WACC = 9.40% WACC = 9.50% WACC = 9.86% MCC New capital raised & invested during the year Optimal Capital Budget WACC=weighted cost of capital MCC=marginal cost of capital IOS=investment opportunity schedule