The Winter Textle Company has the following capital structure, which is consider to be

optimal:

Debt 25%

Preferred stock 15

Common equity 60

Total capital 100%

Winter Textless expected net income this year is $18,000; its established dividend payout ratio is 35%;

its federal-plus-state tax rate is 40%; and investors expect earnings and dividends to grow at a constant

rate of 8% in the future. Winter Textile is expected to pay a dividend of $3.00 per share in the upcoming

year, and its stock currently sells at a price of $70 per share

Winter Textile can obtain new capital as indicated below:

Debt: Up to $3,000 of debt can be sold at an interest rate of 11%; debt in the range of $3,001 to

$6,000 must carry an interest rate of 13%; and all debt over $6,000 will have an interest of 15%.

Preferred: New preferred could be sold at a price of $120 per share, with a dividend of $10.

Floatation costs of $6 per share would be incurred for up to $4,000 of preferred, while these costs

would rise to $12, on all preferred over $4,000.

Common: New common stock would have a floatation cost of 10% for up to $7,000 of stock and

15% for all common over $7,000.

The following are the 5 projects (all of them divisible) under consideration by Winter Textile:

Project Initial Cost Annual after-tax CF Project Life (Years)

A $5,000 $1,095.60 7

B 5,000 1,577.21 5

C 5,000 1,085.09 8

D 10,000 1,894.74 10

E 10,000 2,713.92 6

a. Find the break points in the MCC schedule.

b. Determine the component costs of capital for each capital structure component.

c. Calculate the weighted average cost of capital in the interval between each break in the MCC schedule.

d. Calculate the IRR for Projects A, B, C, D, and E.