B. Break point associated with common equity. Oâ??Grady plans to use 25% long term debt in its capital structure. Every $1 in debt the firm uses, it will use $3 from other financing sources.
Total financing is then $4, because $1 comes from long term debt, its share in the total is the desired 25%.
After firm raises $700,000 in long term debt, financing source rises, the firm can raise total capital of 2.8 million in other sources to maintain the 25% for debt. 2.8 million is the break point for debt.
Firm wants to maintain 25% long term debt, wants to raise more that 2.8 million in total financing, it will require more than $700,000 in long term debt, and it will trigger the higher cost of the additional debt it issues beyond 700,000.
2. Using the break points developed in part (1), determine each of the ranges of total new financing over which the firm's weighted average cost of capital (WACC) remains constant.
3. Calculate the weighted average cost of capital for each range of total new financing.

Weighted average cost of capital takes a weighted average of the rates the firm pays on debt and equity. The weight in this case is 25% debt and 75% equity, so ...

Solution Summary

This solution calculates the weighted average cost of capital for each range of total new financing.

... Hence single weighted average cost of capital is not used. ... This explains the concept such as weighted Average cost of capital, Marginal cost of capital and NPV. ...

... based on their relative size to an average for the ... debt and equity, the debt component averages the cost... rate presuming interest is deductible, weighted by the ...

If the weighted average cost of capital for the firm is 4% and the projects are mutually exclusive, which project would you choose based upon the NPV rule? ...

The solution to weighted-average cost of capital. A firm's current balance sheet is as follows: ... The weighted-average cost of capital is assessed. ...

Weighted Average cost of capital (WACC). ... The weighted average cost of capital is the total cost, to the firm, for all sources of financing undertaken. ...

Given the following information, calculate the weighted average cost of capital for Hamilton Corp. ...Weighted average cost of capital (Ka).... 7.70%. ...