ABC Inc. is reviewing the following projects for next years capital program.

Project	A	B	C	D	E	F
IRR	10.5%	10.0%	9.5%	9.0%	8.5%	8.0%
Capital Required	$1.2m	$0.6m	$0.6m	$0.5m	$0.5m	$0.8m

ABC Inc. has a target capital mix of 40% debt and 60% equity. Over the next year, the company will have $0.9 million available from net income to fund this capital program. Firm can also borrow up to $1 million at the current borrowing rate. The after-tax cost of existing debt is 5.5%. ABC can borrow up to $1 million at this current rate, but the new debt is 6.5% after tax. The cost of existing equity is 10.5% and the cost of new equity is 11.83%.

11. Find the breakpoints in the marginal cost of capital (MCC) schedule.

____

A) $4 million and $6.5 million

B) $1.5 million and $2.5 million

C) $5 million and $8 million

D) $1.67 million and $2.25 million

Hint: BP = (Amount available from source)/(Capital source portion)

12. To undertake all six projects, the company needs to raise $4.2 million. What is the weighted average cost (WACC) of these funds?

____

A) 8.63%

B) 9.70%

C) 10.97%

D) 12.50%

13. How much of the increase in WACC is due to the new equity capital?

____

A) 0.80%

B) 1.00%

C) 1.20%

D) 1.33%

14. What is the ABCs optimal capital budget?

____

A) $1.2 million

B) $1.8 million

C) $2.4 million

D) $2.9 million