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The FireBasket Company uses a target capital structure when calculating the cost of capital. The target structure and current component costs based on market conditions

The FireBasket Company uses a target capital structure when calculating the cost of capital. The target structure and current component costs based on market conditions follow.

Component

Mix

Cost*

Debt

25%

8%

Preferred Stock

10

12

Common Equity

65

20

The firm expects to earn $2 million next year and plans to invest $1.8 million in new capital projects. It generally pays dividends equal to 60% of earnings. Flotation costs are 10% for common and preferred stock.

What is FireBasket's initial WACC?

= 16.20%

Where is the retained earnings breakpoint in the MCC?

= $1,230,769.23

What is the new WACC after the break?

=23.70%

Please answer the following:

FireBasket can borrow up to $.4 million at a net cost of 8% as shown. After that the net cost of debt rises to 12%. What is the new WACC after the increase in the cost of debt?

Where is the second break in the MCC? That is, how much total capital has been raised when the second increase in WACC occurs?

Create a graph showing FireBasket's MCC.

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