A firm\'s correctly computed capital structure consists of 20% debt. 10% preferr

Question

A firm's correctly computed capital structure consists of 20% debt. 10% preferred stock, and 70% equity. If new debt of $3 million can be raised at the current interest rale before a higher yield must be paid to investors, at what point will the MCC break upward because of the cost of debt? $3,000,000 $10,000,000 $15,000,000 none of the above A project has an IRR of 16% and is being considered by a firm with $5 million in debt and $ million in equity. Assuming the debt costs 12% (after-tax value), what is the most equity can cost for the project to be acceptable to the firm? 18.25% 17.83% 17.33% 16.89%

Explanation / Answer

Answer 19: Answer 'a' is correct. That is $ 3,000,000. because an addittion in capital always raise the MCC break upward.

Answer 20 : Answer 'c' is correct. That is 17.33%.

Answer WCC Amount Wieght in capital Cost Equity 15000000 75% 17.33% 13% Debt 5000000 25% 12% 3% Total 20000000 100% 16% Cost of equity = 13%/75% = 17.33%

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