Question

The Tyler Oil Company’s capital structure is as follows: Debt 65 % Preferred stock 10 Common equity 25 The aftertax cost of debt is 11 percent; the cost of preferred stock is 14 percent; and the cost of common equity (in the form of retained earnings) is 17 percent. a-1. Calculate Tyler Oil Company’s weighted average cost of capital. (Round the final answers to 2 decimal places.) Weighted Cost Debt (Kd) % Preferred stock (Kp) Common equity (Ke) Weighted average cost of capital (Ka) % As an alternative to the capital structure shown above for Tyler Oil Company’s, an outside consultant has suggested the following modifications. Debt 35% Preferred stock 15 Common equity 50 Under this new and more debt-oriented arrangement, the aftertax cost of debt is 11.8 percent, the cost of preferred stock is 9 percent, and the cost of common equity (in the form of retained earnings) is 12.0 percent. a-2. Calculate Tyler’s weighted average cost of capital. (Round the final answers to 2 decimal places.) Weighted Cost Debt (Kd) % Preferred stock (Kp) Common equity (Ke) Weighted average cost of capital (Ka) % b. Which plan is optimal in terms of minimizing the weighted average cost of capital? Plan 2 Plan 1

Answer 1