# Stupid Cost of Debt Question

A companys schedule of the costs of debt and equity shows that additional \$ million of debt can be issued at an after tax cost of 3% and additional equity of \$9 million at a cost of 6%. The company plans to maintain a capital structure of 30% debt and 70% equity. At what level of new capital financing will the marginal cost of capital change with the issuance of new debt? A. \$3 million B. \$10 million C. \$9 million D. \$12.86 Can someone explain this? Thanks

you missing a number next to dollar sign. if that number is 1, so the level at which MCC will change upward is 1000000/.3= 3333333. answer A

How much debt can be issued for 3%? I think you have missed the digit. Anyway, the calulation goes like this: Amount of debt before % cost change/proportion of debt in capital structure= x \$9m/0.7 = 12.86m which ever is lower out of x and 12.86 is your answer. This simulates building the capital structure in the correct proportion and finding the â€˜break pointâ€™.

3 Million Sorry