OPTIMAL CAPITAL BUDGET

a$.$ The target capital structure is debt $30\%,$ preferred stock $20\%,$ and common equity $50\%.$

b$.$ Projected ratained earnings are $$6$ million.

c$.$ Up to $$9$ million can be raised via bond at $10\%$ YTM$.$ If more than $$9$ million is raised via debt, the

YTM rises to $11\%.$ The applicable tax rate is $40\%.$

d$.$ An unlimited amount can be raised via preferred at $12\%$ yield to investors $($floatation cost $5\%).$

e$.$ The common stock dividend has grown at a $7\%$ annual rate in the last $5$ years. The same growth

rate is expected to continue in the future. The current dividend is $$\mathrm{.}42.$

f$.$ Common stocks are selling for $$5$ a share. The floatation cost for new common stocks is $10\%.$

g$.$ The following four capital projects have been identified. All of them are of average risk,

independent, and non$-$divisible.

A$.$ Show the breaking points below:

Breaking Points

Because of the increase in this component cost

B$.$ Show your component cost computation and fill in the blanks below:

$K_b$ is $($are$)$:

Kon is:

KRE is: $($Implied $g=?)$

Kros is

C$.$ Show below your WACC computation for each interval $($use the market value weight you computed

above$)$ by filling in the blanks in the table:

D$.$ The optimal capital budget is $\{$

Show your diagram with labels.