How do you approach this - Corp Finance corporate, investment, structure, increase, available

wildrose

Hi all,

How do you approach this question in corporate finance..the explanation does not make me realize how to approach the problem :

Grove Ind. has a target capital structure of 30% debt . 40% common equity, and 30% preferred equity, marginal tax rate is 34%. Grove has 1.6 million of retained earnings available for investment and its investment bankers have stated that they can sell up to 1.5 million in new bonds at a YTM of 8.3%. but will have to increase yield to 9% to issue new bonds in excess of that amount. Grove's marginal cost of capital schedule will reflect an increase in its WACC at a total amount of investment of :

A. 1.6 million
B. 3.0 million
C. 5.0 million

Any advisement on how you look at this problem would really help..thanks again

burnsy562000

I would go by answer choices. 30% of 5 is 1.5 and that's the point where cost is increasing. For, 1.6, it's .48 and for 3 its .9 which are well under the limits.

cchang

Another approach would be to calculate break point BP=debt amount/% of debt in captital structure=1.5/.3=5 million

rgonzalez

Answer c, 5million
which vendor is that ? I find the wording of the question a little bit "gross"