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giants2010

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tT
发表于 2013-4-8 20:58 | 只看该作者

Stupid Cost of Debt Question

additional, financing, structure, maintain, schedule
A companys schedule of the costs of debt and equity shows that additional $ million of debt can be issued at an after tax cost of 3% and additional equity of $9 million at a cost of 6%. The company plans to maintain a capital structure of 30% debt and 70% equity. At what level of new capital financing will the marginal cost of capital change with the issuance of new debt?
A. $3 million
B. $10 million
C. $9 million
D. $12.86
Can someone explain this? Thanks
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Swanand

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2#
发表于 2013-4-8 20:59 | 只看该作者
you missing a number next to dollar sign. if that number is 1, so the level at which MCC will change upward is 1000000/.3= 3333333. answer A

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yodacaia

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3#
发表于 2013-4-8 20:59 | 只看该作者
How much debt can be issued for 3%? I think you have missed the digit.
Anyway, the calulation goes like this:
Amount of debt before % cost change/proportion of debt in capital structure= x
$9m/0.7 = 12.86m
which ever is lower out of x and 12.86 is your answer. This simulates building the capital structure in the correct proportion and finding the ‘break point’.

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FVPV

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4#
发表于 2013-4-8 20:59 | 只看该作者
3 Million Sorry

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OmarAdnan

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5#
发表于 2013-4-8 21:00 | 只看该作者
And the answer is B

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agulani

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6#
发表于 2013-4-8 21:00 | 只看该作者
answer is 10 = B

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bkballa

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7#
发表于 2013-4-8 21:00 | 只看该作者
If $3M can be raised changing the cost of debt, and keeping the same capital structure, the $3M represent 30%, how much would 70% be? 7M. Total, 3M+7M=10M

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RobertA

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8#
发表于 2013-4-8 21:01 | 只看该作者
Ok so they can offer $9 million/.7 more equity before changing marginal cost of equity?

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hariRaj

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9#
发表于 2013-4-8 21:01 | 只看该作者
No, the amount of debt that can be raised at an after tax cost of 3% is 3M, the amount of equity that can be raised at an after tax cost of 6% is 9M. Beyond/or at these thresholds, the cost changes. 9/.7 is how much capital would in total be raised, if from equity was 9M (9/.7=12.86, of which 9M equity and the rest 12.869=3.86 would have been debt, and the capital structure of 30% debt and 70% equity would have remained the same).

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