PepsiCo$$s debt is rated A by most rating agencies and stock beta is $0\mathrm{.}60$ as of $2023.$ High$-$grade corporate debt yields $5\mathrm{.}3\%,$ medium$-$grade yields $6\mathrm{.}30\%$ and low grade yields $9\%.$ The firm is taxed at $20\%$ and relies on long$-$term debt at $$35$ billion and equity at $$17$ billion for capital. The firm believes their capital structure is optimal.

Management project the firm's net income will equal $$10$ billion during the next year and will pay dividends equal to $$6\mathrm{.}0$ billion. First, estimate the weighted, average, after$-$tax cost of capital for PepsiCo when relying on retained earnings for equity. Management estimates their cost of equity to be about $8\mathrm{.}00\%$ when relying on equity from income retained. Derive the cost of debt from their credit rating and the pricing of comparable quality debt. Second, identify the dollar breakpoint for the firm's cost of capital when the company would no longer rely on retained earnings for the pro$-$rata share of capital but must issue common stock given projections of net income and dividends. Third, briefly indicate why PepsiCo relies so heavily on long$-$term debt rather than equity for capital.