Misty Ltd wishes to determine its weighted marginal cost of capital. In preparing for this task, it has compiled the following data:
|
Source of Capital
|
Target
|
Range of Financing
|
After-Tax
|
|
|
|
Proportion
|
$
|
|
$
|
Cost
|
|
|
Long-Term Debt
|
0.4
|
0
|
to
|
300,000
|
0.065
|
|
|
|
|
300,001
|
to
|
600,000
|
0.075
|
|
|
|
|
600,001
|
and above
|
0.090
|
|
|
Preference Shares
|
0.1
|
0
|
to
|
100,000
|
0.095
|
|
|
|
|
100,001
|
and above
|
0.100
|
|
|
Ordinary Shares
|
0.5
|
0
|
to
|
500,000
|
0.11
|
|
|
|
|
500,001
|
to
|
1,000,000
|
0.125
|
|
|
|
|
1,000,001
|
and above
|
0.14
|
|
a) Determine the breaking points and ranges of total financing associated witheach source of capital;
b) Using the data developed determine the levels of total financing at whichthe firm's weighted average cost of capital (WACC) will change;
c) Calculate the weighted average cost of capital and the weighted marginal cost (WMCC) for each range of total financing
d) Using the results along with the information on the available investmentopportunities shown below, compile the firm's investment opportunitiesschedule (IOS), plot this schedule and plot the weighted marginal cost of capital schedule
|
Investment Opportunities Schedule
|
|
Investment
|
IRR
|
Initial
|
|
Opportunity
|
Investment
|
|
A
|
0.14
|
200,000
|
|
B
|
0.12
|
300,000
|
|
C
|
0.11
|
500,000
|
|
D
|
0.1
|
300,000
|
|
E
|
0.09
|
600,000
|
|
F
|
0.08
|
100,000
|
e) Which, if any of the available investments would you recommend that the firm accept? Explain your answer.