Killer Burgers\' capital structure consists of 20 percent debt, 30 percent prefe

Question

Killer Burgers' capital structure consists of 20 percent debt, 30 percent preferred stock, and 50 percent common stock. If Killer raises new capital, its after-tax cost of debt will be 3.5 percent, its cost of preferred stock will be 6 percent, its cost of retained earnings will be 10.2 percent, and its cost of new common equity will be 12.4 percent. If Killer needs to raise $220,000 and it expects to generate $100,000 in retained earnings this year, what is the marginal cost of capital to raise the needed funds?

Explanation / Answer

Marginal cost of capital = (20% × 3.50) + (30 × 6%) + (50 × 12.40%)

= 0.70% + 1.80% + 6.20%

= 8.70%

Marginal cost of capital is 8.70%.

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