Your firm is in the process of determining its capital budget for the next fiscal year. The firms current capital structure, which it considers to be optimal, is contained in the following balance sheet:

Discussions between the firms financial officers and the firms investment and commercial bankers have yielded the following information:

The firm can borrow $40 million from its bank at a pretax cost of 13 percent.

The firm can borrow $80 million by issuing bonds at a net price of $687 per bond. The bonds would carry a 10 percent coupon rate and mature in 20 years. Par is $1000.

Additional debt can be issued at a 16 percent pretax cost.

Preferred stock can be issued at a cost of 16.5 percent.

The firm expects to generate $140 million in net income and pay $2 per share in dividends.

The $2-per-share dividend (D1) represents a growth of 5.5 percent over the previous years dividend. This growth rate is expected to continue for the foreseeable future. The firms stock currently is trading at $16 per share.

The firm can raise external equity by selling common stock at a net price of $15 per share.

The firm's marginal tax rate is 40 percent.

Question 1: At what total budget does the WMCC go up again? (Hint: We've calculated the starting level of the WMCC and the level after that, now identify the point at which the WMCC rises again).

Question 2: What is the dollar amount at the final breakpoint (increment)?

\begin{tabular}{lrlr} \hline Current assets & $110 & Accounts payable & $30 \\ Fixed assets & 260 & 0ther current liabilities & 20 \\ \cline { 2 - 4 } Total assets & $370 & Long-term debt & 128 \\ & & Preferred stock & 32 \\ & & Common stock (20 million shares at par) & 20 \\ & & Contributed capital in excess of par & 30 \\ & & Retained earnings & 110 \\ & & Total liabilities and equity & $370 \\ \hline \end{tabular}