CMA Study Group

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  • 1.  WACC. When do we use RE to lower the Capital Structure % for our Common Stock?

    Posted 10-05-2019 11:25 AM

     had the idea that when there is RE available, we use the amount to re-structure what the Weighted % of each type of financing would be. 40% of Debt and 60% of Equity is optimal, but after implementing RE, we should use 40% of Debt, 42% of RE and 18% of Common Stock. This has proved correct in every other problem.

    Why are we not considering the use of RE in this problem? I can't wrap my head around it...



  • 2.  RE: WACC. When do we use RE to lower the Capital Structure % for our Common Stock?

    Posted 10-05-2019 11:28 AM
    Its asking for the "marginal" that means after exhausting the RE






  • 3.  RE: WACC. When do we use RE to lower the Capital Structure % for our Common Stock?

    Posted 10-06-2019 12:06 PM
    I agree that the question is tricky. You might find it useful to read following article: https://www.investopedia.com/terms/m/marginal-cost-of-funds.asp
    I guess the confusion arises from interpreting the requested marginal cost of funds as the weighted-average cost of funds.
    Here the question asks for the marginal cost of capital while it says before that anticipated earnings to be retained are 3 Mio.
    This means that the anticipated earnings will be retained and will not be available for any projected capital expansion in excess of 7 Mio.

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    Giulio La Bua
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