Sholegg Resurfacing plants to retain $125,000 of its income this year for reinve

Question

Sholegg Resurfacing plants to retain $125,000 of its income this year for reinvestment. Financial analysts have determined that the firm's after-tax cost of debt is 4.8 percent, its cost of internal equity is 9 percent, and its cost of external equity is 11.5 percent. Sholegg experts to finance capital budgeting projects so as to maintain its current capital structure, which consists of 55 percent debt. Sholegg has no preferred stock. What will Sholegg's marginal cost of capital be if its total capital budgeting needs are $300,000 for the year?

Explanation / Answer

Required Capital= $ 300000

Debt = 55 % of 300000=165000

Assuming that the remaining 135000 is raised equally through internal and external equity.

Internal equity= 135000* 50%= 67500

External Equity = 135000* 50%= 67500

Now, Marginal cost of capital= cost of additional capital raised

= weighted average cost of raising 300000

= 4.8 * 165000/300000 + 9 * 67500/300000 + 11.5* 67500/300000

=7.25 %

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