Question $7$

$11pts$

Assume that a firm has the following capital structure and costs:

Source of Capital

Target Market Proportions

Cost

for source

Long$-$term debt

$40\%$

$7\mathrm{.}6\%($this is the BEFORE$-$tax cost$)$

Preferred stock

$10\%$

$11\mathrm{.}2\%$

Common$-$stock equity

$50\%$

$k_{RE}=14\mathrm{.}3\%$

$k_s=15\mathrm{.}2\%$

The firm has a tx rate of $40\%.$

The firm has $$1,000,000$ of retained earnings available.

At what level of total financing will retained earnings be exhausted $($breaking point$)?$

$$4,000,000$

$$2,000,000$

$$5,000,000$

$$500,000$

$$400,000$