s Orthodontic Services (sos) will retain for reinvestment $300,000 of the net in
ID: 2791784 • Letter: S
Question
s Orthodontic Services (sos) will retain for reinvestment $300,000 of the net income it expects to generate next year. Recently, the CFO determined that the firm's after-tax cost of debt, rdT, is 5 percent, its cost of internal equity (retained earnings), rs, is 10 percent, and its cost of external equity (new common stock), Fer is 13 percent. Next year, sOS expects to finance c percent debt. SOS has no preferred stock. percent debt sos as no peered stind projects and to maintain its curent capital structure, which cots of co a. What will sos's marginal cost of capital be if its total capital budgeting needs are $700,000 for next year?Explanation / Answer
Next year there is need of 700,000$
60% of 700,000 ie $420,000 will be raised through debt and remaining 280,000 will be financed by equity
Company has enough retain earnings to satisfy equity portion hence company will not be required to issue new shares
Thus WACC = Weight of debt*cost of debt + Weight of equity*cost of reatin earnings
=0.6*5% + 0.4*10%
=3%+4%
=7%
Thus Marginal cost of capital = 7%
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