Fans by Fay Company has a capital structure of 60 percent debt and 40 percent common equity. The company expects to realize $200,000 in net income this year and will pay no dividends. The effective annual interest rate on its new borrowings increases by 3 percent for amounts over $500,000.

- At what capital budget size will Fans by Fays cost of equity increase?

- In other words, what is its equity break point? At what capital budget size will its cost of debt increase?