Compute the Marginal Cost of Capital for Johnson
1. Compute Capital Structure Weights
2. Compute Retained Earnings Break Point
a. What is the Value of Retained Earnings?
b. Compute Break Point
3. Compute the component costs of:
a. Retained Earnings
b. New Common Stock
c. Preferred Stock
d. Debt
4. Determine the Marginal Cost of Capital (before and after the break point).
5. Which capital Projects should Johnson fund?

Johnson Company has several capital projects they would like to consider and needs to compute their Marginal Cost of Capital. They have compiled the following information:
• Net Income is $100,000 and the company pays a 30% dividend each year.
• The last dividend paid on common stock was .95 and the company common stock sells for $40 today.
• The YTM on their corporate bond is 6%. The bond was issued with a 5% coupon.
• The company has $100 Par Value, 6% Preferred Stock, which has a current price of $75 per share.
• The company has a growth rate of 10% and a marginal tax rate of 24%
• The company would incur 10% floatation costs to issue new common shares.

Selected information from the company’s balance sheet follows:
Long-Term Debt $40,000
Preferred Stock $10,000
Common Equity $50,000

Johnson is considering the following capital projects:
Project Cost IRR
A $70,000 12%
B $50,000 10%
C $50,000 8 ½%
D $80,000 11%

Compute the Marginal Cost of Capital for Johnson 1. Compute Capita...