O'Grady ApparelCost of Financing and Break Points

4

Source of Capital Range of new financingAfter-tax cost (%)Long-term debt $0-$700,000 7.50% 25% 2,800,000

$700,000 and above 10.80%Preferred stock $0 and above 17.94% 10%Common Stock Equity$0-$1,300,000 23.80% 65% 2,000,000

$1,300,000 and above 26%

Source of Capital Range of new financingAfter-tax cost (%) Break PointPart d (1)Long-term debt $0-$700,000 7.50% 50% 1,400,000

$700,000 and above 10.80%Preferred stock $0 and above 17.94% 10%Common Stock Equity$0-$1,300,000 23.80% 40% 3,250,000

$1,300,000 and above 26%

Capital Structure Weight

Break Point (max of low range/capital structure weight

Parts a and b(1)

Capital Structure Weight

O'Grady ApparelCost of Financing and Break Points

4

$0 to $2,000,000Debt 0.25 7.50% 1.88%Preferred 0.1 17.89% 1.79%Common 0.65 23.80% 15.47%

Weighted Average Cost of Capital 19.13%Debt 0.25 7.50% 1.88%Preferred 0.1 17.89% 1.79%Common 0.65 26.00% 16.90%

Weighted Average Cost of Capital 20.56%

$2,800,000 and aboveDebt 0.25 10.80% 2.70%Preferred 0.1 17.89% 1.79%Common 0.65 26% 16.90%

Weighted Average Cost of Capital 21.39%

d (1). Weighted Average Cost of Capital for Ranges of Total New Financing for O'Grady Apparel Company

$0 to $1,400,000Debt 0.5 7.50% 3.75%Preferred 0.1 17.89% 1.79%Common 0.4 23.80% 9.52%

Weighted Average Cost of Capital 15.06%Debt 0.5 10.80% 5.40%Preferred 0.1 17.89% 1.79%Common 0.4 23.80% 9.52%

Weighted Average Cost of Capital 16.71%

$3,250,000 and aboveDebt 0.5 10.80% 5.40%Preferred 0.1 17.89% 1.79%Common 0.4 26% 10.40%

Weighted Average Cost of Capital 17.59%

d. (2) The capital structure in d. is preferred. It allows the firm to finance investment opportunities at a lowercost and 25% LTD in the capital structure seems low. e. (1) O'Grady Apparel Compay appears to employ the Constant-Payout-Ration Dividend Policy. It does not seem appropriate given the firms current investment opportunities. Further it could jeopardize their future stock prices if their earnings decrease and therefore dividends decrease and shareholders are worried aboutstability of the firm.

investments in part c(2) because they would have more financing ability.

b (2) and (3). Weighted Average Cost of Capital for Ranges of Total New Financing for O'Grady Apparel Company

Range of total new financing

Source of Capital

Weight (2)

Cost (3)

Weighted Cost [(2)x(3)]

4

$2,000,001 to $2,800,000

Range of total new financing

Source of Capital

Weight (2)

Cost (3)

Weighted Cost [(2)x(3)]

4

$1,400,001 to $3,250,000

e. (2) Low-Regular-and-Extra Dividend Policy is recommended. This would allow the firm to have more control of equity available for financing as well as protect the stability of the stock price. It would affect the

O'Grady ApparelCost of Financing and Break Points

4

d (1). Weighted Average Cost of Capital for Ranges of Total New Financing for O'Grady Apparel Company

d. (2) The capital structure in d. is preferred. It allows the firm to finance investment opportunities at a lowercost and 25% LTD in the capital structure seems low. e. (1) O'Grady Apparel Compay appears to employ the Constant-Payout-Ration Dividend Policy. It does not seem appropriate given the firms current investment opportunities. Further it could jeopardize their future stock prices if their earnings decrease and therefore dividends decrease and shareholders are worried aboutstability of the firm.

investments in part c(2) because they would have more financing ability.

b (2) and (3). Weighted Average Cost of Capital for Ranges of Total New Financing

e. (2) Low-Regular-and-Extra Dividend Policy is recommended. This would allow the firm to have more control of equity available for financing as well as protect the stability of the stock

O'Grady ApparelCost of Financing and Break Points

4

After tax cost of debt: 0-$700,000

N=10PV=970PMT=-120 (.12*1000)FV=-1000Compute for I=12.5428

.125*(1-.40) 7.50%

After tax cost of debt: above $700,000.18*(1-.40)= 10.80%

Preferred stock $0 and abovepreferred diviend/preferred pricepg 511$60*17%=$10.20$10.20/57= 17.94%

Common stock equity $0-1,300,000 $1,300,000 and above$1.76/20+.15= 1.76/16+.15=

23.80% 26%D1= per share diviend expect at end of year 1Nn=net proceeds from the sale of new common stockg=constant growth in dividends

Used calculator for rd:

ri=r

d*(1-T)

D1/N

n+g

Cost of Financing Break PointsWACC RangesAftertax Costs of Capital