=+debt, its share in the total is the desired 25%). From Table 3, we see that after
Question:
=+debt, its share in the total is the desired 25%). From Table 3, we see that after the firm raises $700,000 in long-term debt, the cost of this financing source begins to rise. Therefore, the firm can raise total capital of $2.8 million before the cost of debt will rise ($700,000 in debt plus $2.1 million in other sources to maintain the 25% proportion for debt), and $2.8 million is the break point for debt. If the firm wants to maintain a capital structure with 25% long-term debt and it also wants to raise more than $2.8 million in total financing, it will require more than $700,000 in long-term debt, and it will trigger the higher cost of the additional debt it issues beyond
$700,000.
Step by Step Answer:
Principles Of Managerial Finance
ISBN: 9781292261515
15th Global Edition
Authors: Chad J. Zutter, Scott Smart