O'Grady Apparel

Cost of Financing and Break Points

Break Point
(max of low
Capital range/capital
Structure structure Parts a
Source of Capital Range of new financingAfter-tax cost (%) Weight weight and b(1)
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 Equit $0-$1,300,000 23.80% 65% $ 2,000,000
$1,300,000 and above 26%

Capital
Structure
Source of Capital Range of new financingAfter-tax cost (%) Weight Break Point Part 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 Equit $0-$1,300,000 23.80% 40% $ 3,250,000
$1,300,000 and above 26%

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

Weighted
Cost
Range of total new Source of Weight Cost [(2)x(3)]
financing Capital (2) (3) 4
Debt 0.25 7.50% 1.88%
$0 to $2,000,000 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%
$2,000,001 to
$2,800,000 Preferred 0.1 17.89% 1.79%
Common 0.65 26.00% 16.90%
Weighted Average Cost of Capital 20.56%
Debt 0.25 10.80% 2.70%
$2,800,000 and above 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

Weighted
Cost
Range of total new Source of Weight Cost [(2)x(3)]
financing Capital (2) (3) 4
Debt 0.5 7.50% 3.75%
$0 to $1,400,000 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%
$1,400,001 to
$3,250,000 Preferred 0.1 17.89% 1.79%
Common 0.4 23.80% 9.52%
Weighted Average Cost of Capital 16.71%
Debt 0.5 10.80% 5.40%
$3,250,000 and above 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 lo
cost 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 abo
stability of the firm.
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

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 O'Grady Apparel Company
WACC Ranges

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

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O'Grady Apparel Company
WACC Ranges

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 O'Grady Apparel
After-Tax Costs of Capital (a)

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

Used calculator for rd:
N=10
PV=970
PMT=-120 (.12*1000)
FV=-1000
Compute for I=12.5428
ri=rd*(1-T)
.125*(1-.40) 7.50%

After tax cost of debt: above $700,000

.18*(1-.40)= 10.80%

Preferred stock $0 and above

preferred diviend/preferred price
pg 511
$60*17%=$10.20
$10.20/57= 17.94%

Common stock equity $0-1,300,000 $1,300,000 and above

D1/Nn+g $1.76/20+.15= 1.76/16+.15=
23.80% 26%
D1= per share diviend expect at end of year 1
Nn=net proceeds from the sale of new common stock
g=constant growth in dividends