Question
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.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started