Table 3 Financing Cost Data Long-term debt: The firm can raise $700,000 of additional debt by selling 10-year, $1,000, 6% annual interest rate bonds to net $970 after flotation costs. Any debt in excess of $700,000 will have a before- tax cost, rd, of 9%. Preferred stock: Preferred stock, regardless of the amount sold, can be issued with a $60 par value and a 8% annual dividend rate. It will net $57 per share after flotation costs. Common stock equity: The firm expects its dividends and earnings to grow at a constant rate of 10% per year. The firm's stock is currently selling for $20 per share. The firm expects to have $1,300,000 of available retained earnings. Once the retained earnings have been exhausted, the firm can raise additional funds by selling new common stock, netting $16 per share after underpricing and flotation costs. b. 1. Determine the break point associated with common equity. A break point represents the total amount of financing that the firm can raise before it triggers an increase in the cost of a particular financing source. For example, O'Grady plans to use 25% long-term debt in its capital structure. So, for every $1 in debt that the firm uses, it will use $3 from other financing sources (total financing is then $4, and because $1 comes from long-term debt, its share in the total is the desired 25%). From Table 30, we see that after the firm raises $700,000 in long-term debt, the cost of this financing source begins to rise. Therefore, the firm can raise total capital of $2.8 million before the cost of debt will rise ($700,000 in debt plus $2.1 million in other sources to maintain the 25% proportion for debt), and $2.8 million is the break point for debt. If the firm wants to maintain a capital structure with 25% long-term debt and it also wants to raise more than $2.8 million in total financing, it will require more than $700,000 in long-term debt, and it will trigger the higher cost of the additional debt it issues beyond $700,000. Table 3 Financing Cost Data Long-term debt: The firm can raise $700,000 of additional debt by selling 10-year, $1,000, 6% annual interest rate bonds to net $970 after flotation costs. Any debt in excess of $700,000 will have a before- tax cost, rd, of 9%. Preferred stock: Preferred stock, regardless of the amount sold, can be issued with a $60 par value and a 8% annual dividend rate. It will net $57 per share after flotation costs. Common stock equity: The firm expects its dividends and earnings to grow at a constant rate of 10% per year. The firm's stock is currently selling for $20 per share. The firm expects to have $1,300,000 of available retained earnings. Once the retained earnings have been exhausted, the firm can raise additional funds by selling new common stock, netting $16 per share after underpricing and flotation costs. b. 1. Determine the break point associated with common equity. A break point represents the total amount of financing that the firm can raise before it triggers an increase in the cost of a particular financing source. For example, O'Grady plans to use 25% long-term debt in its capital structure. So, for every $1 in debt that the firm uses, it will use $3 from other financing sources (total financing is then $4, and because $1 comes from long-term debt, its share in the total is the desired 25%). From Table 30, we see that after the firm raises $700,000 in long-term debt, the cost of this financing source begins to rise. Therefore, the firm can raise total capital of $2.8 million before the cost of debt will rise ($700,000 in debt plus $2.1 million in other sources to maintain the 25% proportion for debt), and $2.8 million is the break point for debt. If the firm wants to maintain a capital structure with 25% long-term debt and it also wants to raise more than $2.8 million in total financing, it will require more than $700,000 in long-term debt, and it will trigger the higher cost of the additional debt it issues beyond $700,000