Armstrong Company has the following investment opportunities:

Investment Return

Project A $10,000 8%

Project B $50,000 12%

Project C $28,000 10%

Project D $30,000 11%

Project E $32,000 12%

Project F $45,000 9%

Project G $45,000 10%

Projects C, D, E are mutually exclusive.

All other projects are independent except project G which is dependent on doing project B.

Armstrong (capital rationing) plans - a maximum $200,000 of new sources of financing.

The following sources of capital are available at the following costs:

Debt: $0 to $20,000 6%; $20,000 to $60,000 7%; Over $60,000 8%

Preferred Stock: $0 to $15,000 8%; Over $15,000 10%

Common Stock: $0 to $75,000 12%; Over $75,000 14%

No retained earnings will be used by the firm for capital projects

The optimal capital structure for Armstrong is 40% Debt, 10% Preferred Stock and 50% Common Stock.

Required:

1.Prepare an investment Opportunity Schedule.

% Cumulative

Project Return Cost Investment

2.Calculate the breaking points for new financing.

3.Determine the marginal cost of capital for each interval.

Optimum

Capital After Tax

Structure Amount Cost Percent

Debt .40

Preferred .10

Common .50

Total MCC

Debt .40

Preferred .10

Common .50

Total MCC

Debt .40

Preferred .10

Common .50

Total MCC

4.Determine which projects should be completed. ___________________