Colbyco Industries has a target capital structure of 60 percent common equity, 30 percent debt, and 10 percent preferred stock. The cost of retained earnings is 15 percent, and the cost of new equity (external) is 16 percent. Colbyco anticipates having $20 million of new retained earnings available over the coming year. Colbyco can sell $15 million of first-mortgage bonds with an after-tax cost of 9 percent. Its investment bankers feel the company could sell $10 million of debentures with a 9.5 percent after-tax cost.
Additional debt would cost 10 percent after tax and be in the form of subordinated debentures. The after-tax cost of preferred stock financing is estimated to be 14 percent.
Compute the marginal cost of capital schedule for Colbyco, and determine the break points in the schedule.