Professional Documents
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CAPITAL
• Example:
For Newco, assume we expect it to earn $50 million next
year. As mentioned in our previous examples, Newco's payout
ratio is 30%. What is Newco's breakpoint on the marginal cost
curve, if we assume wce = 55%?
• Newco's breakpoint = $50 million (1-0.3)
= $63.6 million 0.55
• Thus, after Newco raises roughly $64
million of total capital, new common
equity will need to be issued and Newco's
WACC will increase to 8.6%.
• Factors that affect the cost of capital can
be categorized as those that are
ANSWER controlled by the company and those
that are not.
MCC Vs. WACC
• A firm wishes to raise funds up to Rs. 10,00,000 and finds that its WMCC depends upon the
amount of funds raised. The firm has set pattern of financing i.e., 75% shareholders funds and
25% debt. The shareholders funds may be taken as consisting of retained earnings and
capital. Cost of capital for each source is given below.
QUESTION •
• Retained earnings of Rs.1,50,000 will be from current earnings at 12% cost of capital.
• Step 2 : Find out breaking points at different levels of each source as follows :
•
• Therefore, the WMCC at different levels of
financing are :
•
• Levels of Financing
WMCC
•
• Up to Rs. 2,00,000
10.25%
• 2,00,000 – 4,00,000
ANSWER 11.75%
Marginal Cost of Capital
• 4,00,000 – 8,00,000
12.00%
• 8,00,000 – 12,00,000
14.75%
THANK YOU
SUBMITTED BY:-
SHUBHAM RANA
MUKUL