Principles of Managerial Finance

a. Calculate the specific cost of each source of financing. (Round answers to the

nearest 0.1%.)

b. The firm’s capital structure weights used in calculating its weighted average

cost of capital are shown in the table above. (Round answer to the near-

est 0.1%.)

(1) Calculate the single break point associated with the firm’s financial situa-

tion. (Hint:This point results from exhaustion of the firm’s retained

earnings.)

(2) Calculate the weighted average cost of capital associated with total new

financing below the break point calculated in part (1).

(3) Calculate the weighted average cost of capital associated with total new

financing above the break point calculated in part (1).

11 – 17 Integrative—WACC, WMCC, and IOS Cartwell Products has compiled the

data shown in the following table for the current costs of its three basic sources

of capital—long-term debt, preferred stock, and common stock equity—for vari-

ous ranges of new financing.

The company’s capital structure weights used in calculating its weighted

average cost of capital are shown in the following table.

Source of capital Weight

Long-term debt 40%

Preferred stock 20

Common stock equity  (^4)  (^0) 
Total 1

0

0

%
Source of capital Range of new financing After-tax cost
Long-term debt $0 to $320,000 6%
$320,000 and above 8
Preferred stock $0 and above 17%
Common stock equity $0 to $200,000 20%
$200,000 and above 24
Source of capital Weight
Long-term debt 30%
Preferred stock 20
Common stock equity  (^5)  (^0) 
Total 1

0

0

%
CHAPTER 11 The Cost of Capital 501
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