Stupid Cost of Debt Question additional, financing, structure, maintain, schedule

giants2010

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

hariRaj

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).

RobertA

Ok so they can offer $9 million/.7 more equity before changing marginal cost of equity?

bkballa

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

agulani

answer is 10 = B

OmarAdnan

And the answer is B

FVPV

3 Million Sorry

yodacaia

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’.

Swanand

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