The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan’s current capital structure calls for 35 percent debt, 30 percent preferred stock, and 35 percent common equity. Initially, common equity will be in the form of retained earnings  (Ke)
  and then new common stock  (Kn)
  . The costs of the various sources of financing are as follows: debt (after-tax), 8.3 percent; preferred stock, 11 percent; retained earnings, 9 percent; and new common stock, 12.2 percent. The 8.3 percent cost of debt referred to earlier applies only to the first $35 million of debt. After that, the cost of debt will be 9.3 percent. At what size capital structure will there be a change in the cost of debt? 

To determine the size of the capital structure at which there will be a change in the cost of debt for Nolan Corporation, we need to focus on how the debt is structured.

From the problem:
- The cost of debt is 8.3% for the first $35 million of debt.
- After the $35 million mark, the cost of debt increases to 9.3%.

Nolan's capital structure consists of:
- 35% debt
- 30% preferred stock
- 35% common equity

### Step-by-Step Breakdown:

1. **Proportion of Debt in the Capital Structure**:  
   Debt makes up 35% of the total capital structure.

2. **Total Capital Corresponding to the First $35 Million in Debt**:  
   The $35 million of debt corresponds to 35% of the total capital. To find the total capital structure that corresponds to $35 million of debt, use the following formula:

   \[
   \text{Total Capital} = \frac{\text{Amount of Debt}}{\text{Debt Proportion}}
   \]

   Substituting the values:

   \[
   \text{Total Capital} = \frac{35,000,000}{0.35} = 100,000,000
   \]

Thus, the total size of the capital structure at which the cost of debt will change is **$100 million**. Beyond this point, the cost of debt will increase from 8.3% to 9.3%.

Would you like more details, or do you have any questions?

### Related Questions:
1. How do retained earnings and new common stock affect the cost of equity?
2. What is the overall weighted average cost of capital (WACC) before and after the change in debt cost?
3. How would issuing more preferred stock influence the capital structure?
4. What role does the tax rate play in the cost of debt calculation?
5. How can Nolan Corporation optimize its capital structure to minimize the WACC?

### Tip:  
When analyzing capital structure, always check how changes in financing costs (such as increased debt rates) impact the overall cost of capital.

The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan’s current capital structure calls for 35 percent debt, 30 percent preferred stock, and 35 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt (after-tax), 8.3 percent; preferred stock, 11 percent; retained earnings, 9 percent; and new common stock, 12.2 percent. The 8.3 percent cost of debt referred to earlier applies only to the first $35 million of debt. After that, the cost of debt will be 9.3 percent. At what size capital structure will there be a change in the cost of debt?

Find out when Nolan Corporation’s cost of debt increases from 8.3% to 9.3%. This finance problem explores capital structure, marginal cost of capital, and debt proportions, providing a detailed solution using the formula: Total Capital = Amount of Debt / Debt Proportion. Suitable for college-level finance students.

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