Suppose that Ace could obtain only $ 12,000,000 of debt at the cost of debt percentage found in 3a, with any additional debt costing 10% before taxes.Based on this information and your answers to the previous questions, construct the company's MCC schedule.Be sure to include the breakpoints, a table showing your WACC calculations, and an MCC graph.

a.How large could the company's capital budget be before it is forced to sell new common stock?Ignore depreciation at this point.

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b.Would the MCC schedule remain constant beyond the retained earnings break point, no matter how much new capital it raised?Explain.Again ignore depreciation.

Response:

c.Given the following investment opportunities for the coming year, graph the company's MCC/IOS schedule.

Project

Initial Cost

Life

IRR

A

20,000,000

5

15.4%

B

15,000,000

7

12.7%

C

20,000,000

5

13.5%

D

10,000,000

4

10.8%

E

15,000,000

6

11.5%

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d.What is the WACC that should be used by the firm to optimize its capital budgeting decisions.Explain why.

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e.Which projects should the company accept based on the IRR's?What is the company's optimal capital budget?

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Question 11

Should the corporate cost of capital as developed above be used for all projects? If not, what type of adjustment should be made?

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