Whitson Hog Heaven Inc. has the following capital budgeting opportunities this year. The following are the IRR and corresponding investments required by the projects listed below:

Project IRR Investment

A 10% $1,000

B 13% $3.000

C 14% $2,000

D 9% $5,000

E 15% $9,000

Whitsons balance sheet is: Assets $600,000 Liabilities: $500,000

Equity $100,000

Whitson has available to him 3 sources of debt. Short term debt available of $5,000 and Long-term debt of up to $6,000 and above $6,000. The after-tax cost of these debts in random order are 12%, 10% and 14%. Whitson has earned net income of $10,000 and pays dividends of 0.02 cents a share on 100,000 shares. He will in the future grow that dividends by 10% a year. He can issue new common stock with an underwriting charge of 15%. His share value is determined by his historical equity value on the balance sheet per share.

1. Compute the component cost of Retained earnings and New Common Stock. 4 points

K_{RE =}

K_{NCS =}

2. Compute the points where Whitsons source of funds run out based on capital spending. (Break points) 3 points

3. Graph the IOS/MCC schedule. 4 points

4. What is the optimal capital budget? 2 points

5. What happens to Ka when: Make sure to explain your answer. 6 points

a. Market interest rates increase.

b. A firm exceeds it borrowing capacity.

c. The growth rate to dividends is increased.