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FIN 36053 Chapter 11 Homework WACC 3. Eddy's Chop Shop is considering an expansion project to increase sales. The project, which costs $3.8 million, has an IRR equal to 10%. The firm expects to retain $1.5 million of earnings this year. It can raise $500,000 in new debt with a before tax cost equal t 5 percent; and additional debt will cost 8 percent before taxes. The firms cost of retained earnings is 12 percent and its cost of new equity is 14 percent. Its target capital structure consists of 40 percent debt and 60 percent equity. If the firm's marginal tax rate is 40 percent, what is the optimal capital budget? In order to receive full credit, you must include a graph of the MCC and IOS, similar to what is found in Figure 11.4 in your text. tax rate = 40% SC Project costs 3.8 million Irr = 10% Retain = 1.5 million new debte = $500,000 before tax cost = D% 6% +8% redaned carnings FIN 36053 Chapter 11 Homework WACC 3. Eddy's Chop Shop is considering an expansion project to increase sales. The project, which costs $3.8 million, has an IRR equal to 10%. The firm expects to retain $1.5 million of earnings this year. It can raise $500,000 in new debt with a before tax cost equal t 5 percent; and additional debt will cost 8 percent before taxes. The firms cost of retained earnings is 12 percent and its cost of new equity is 14 percent. Its target capital structure consists of 40 percent debt and 60 percent equity. If the firm's marginal tax rate is 40 percent, what is the optimal capital budget? In order to receive full credit, you must include a graph of the MCC and IOS, similar to what is found in Figure 11.4 in your text. tax rate = 40% SC Project costs 3.8 million Irr = 10% Retain = 1.5 million new debte = $500,000 before tax cost = D% 6% +8% redaned carnings