Question

1-if a firm has 1500000 debt limit before AT kd will change and if taxes are 40% and total equity in capital structure is 40% and the rest is debt calculate the debt break point in the MCC schedule interest is tax deductible

a) $1000000

b) $7500000

c)$2500000

d)$3750000

2) the cost of internal common equity is equal to

a) the cost of retaind earnings

b) the cost of new common stock

c) the cost of preferred stock

d) the cost of debt before taxes

Answer 1

1) Break Point = Level of debt / Weight of debt = 1,500,000 / 60% = 2,500,000

Hence, c is correct.

2) a is correct.

Cost of internal equity is same as cost of retained earnings.