23. The Longenes Company uses a target capital structure when calculating the cost of capital. The target structure and current component costs based on market conditions follow.

The firm expects to earn $20 million next year and plans to invest $18 million in new capital projects. It generally pays dividends equal to 60% of earnings.
Flotation costs are 10% for common and preferred stock.

a. What is Longenes’s initial WACC?

b. Where is the retained earnings breakpoint in the MCC? (Round to the nearest $.1 million.)

c. What is the new WACC after the break? (Adjust the entire cost of equity for flotation costs.)

d. Longenes can borrow up to $4 million at a net cost of 8% as shown. After that the net cost of debt rises to 12%. What is the new WACC after the increase in the cost of debt?

e. Where is the second break in the MCC? That is, how much total capital has been raised when the second increase in WACC occurs?

f. Sketch Longenes’s MCC.

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Component Mix Cost Debt Preferred stock Common equity 25% 8% 10 12 65 20 *The costs of debt and preferred stock are already adjusted for taxes and/or flotation costs. The cost of equity is unadjusted.