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    Marginal cost of capital schedule

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    Owen's enterprises is in the process of determining its capital budget for the next
    fiscal year. The firms current capital structure, which it considers to be optimal, is
    contained in the following balance sheet.

    Balance Sheet
    Current Assets $40,000,000 Accounts Payable $20,000,000
    Fixed Assets 400,000,000 Other Current Liabilities 10,000,000
    Total Assets $440,000,000 Long term debt 123,000,000
    Common Stock at par 15,000,000.00
    Paid in capital in excess of par 51,000,000
    retained earnings 220,500,000
    Total Liabilities and
    stockholders equity $440,000,000

    The following information has been obtained from conversations with financial officers, and the firms investment
    banker and lead bank

    ?The firm expects net income from this year to total $80 million. The firm intends to maintain its dividend
    policy of paying 42.25 percent of earnings to stock holders

    ?The firm can borrow $18 million from its bank at a 13 percent annual rate

    ?any additional debt can be obtained through the issuance of debentures (at par) that carry
    a 15 percent coupon rate

    ?The firm currently pays $4.40 per share in dividends (Do). Dividends have grown at a 5% rate in the
    past. This growth is expected to continue

    ?The firm's common stock currently trades at $4 per share. If the firm were to raise any external equity
    the newly issued shares would net the company $40 per share

    ?The firm is in the 40% marginal tax bracket.

    Computes Owens marginal cost of capital schedule.

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    Solution Preview

    In marginal cost of capital schedule, we find the total capital that can be raised at various cost of capital.
    In this problem, the given capital structure is optimal. So we first find the optimal capital structure

    Long term debt 123,000,000
    Common Stock at par 15,000,000.00
    Paid in capital in excess of par 51,000,000
    retained ...

    Solution Summary

    The solution explains how to compute the marginal cost of capital schedule

    $2.19

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