The total assets of the Dexter Company are $270 million, and the firm’s present capital structure, which follows, is considered to be optimal. Assume that there is no short-term debt.

Long-term debt ........... $135,000,000

Common equity ........... 135,000,000

Total liabilities and equity ......$270,000,000

New bonds will have a 10 percent coupon rate and will be sold at par. Common stock, currently selling at $60 a share, can be sold to net the company $54 a share. Stockholders’ required rate of return is estimated to be 12 percent, consisting of a dividend yield of 4 percent and an expected growth rate of 8 percent. (The next expected dividend is $2.40, so $2.40/$60 = 4%.) Retained earnings are estimated to be $13.5 million. The marginal tax rate is 40 percent. Dexter has determined that acceptable investment opportunities total $70 million.

a. To maintain the present capital structure, how much of the total investment opportunities must Dexter finance by equity?

b. How much of the new equity funds needed will be generated internally? Externally?

c. Calculate the cost of each of the equity components.

d. At what level of capital expenditure (investment) will there be a break in Dexter’s MCC schedule?

e. Calculate the WACC (1) below and (2) above the break in the MCC schedule.

f. Plot the MCC schedule. Also, draw in an IOS schedule that is consistent with both the MCC schedule and the projected capital budget. (Any IOS schedule that is consistent will do.)