### Compute the wac breakpoint

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1. Emma Inc.'s capital structure consists of 30 percent debt and 70 percent common equity. According to its investment banker, Emma Inc. can issue up to \$240,000 new debt at a 3.8 percent cost; for any amount of new debt greater than \$240,000, the cost is 5.5 percent. Emma Inc. expects to generate \$560,000 in retained earnings this year. Compute the WAC breakpoint(s) associated with raising new funds.

2.  Tiger Inc. needs to raise \$85,000 to purchase a new machine. Tiger knows its component costs of capital are , , , and . Tiger maintains a capital structure that consists of 60 percent debt, 10 percent preferred stock, and 30 percent common equity. The firm's marginal tax rate is 30 percent. If Tiger expects to generate \$26,000 in retained earnings this year, what marginal cost of capital will it incur to raise the needed funds?

3. Jackson Inc. is evaluating two independent investments. Project S costs \$150,000 and has an IRR equal to 12 percent, and Project L costs \$140,000 and has an IRR equal to 10 percent. Jackson's capital structure consists of 20 percent debt and 80 percent common equity, and its component costs of capital are , , and . If Jackson Inc expects to generate \$230,000 in retained earnings this year, which project(s) should be purchased?

4. Buddy Inc. has \$6 million in assets, \$700,000 EBIT, 80,000 shares of stock outstanding, and a marginal tax rate equal to 40 percent. If Buddy's debt-to-total-assets ratio (D/TA) is 70 percent, it pays 12 percent interest on debt, whereas if the D/TA ratio is 40 percent, interest is 9 percent. Calculate Buddy's EPS and ROE for each capital structure. Which capital structure is better?

5. Following is the latest income statement for Gracie &Co:

 Sales \$150,000 Variable operating costs (105,000) Gross Profit 45,000 Fixed operating costs (20,000) Net operating income 25,000 Interest (15,000) Earning Before taxes 10,000 Taxes (40%) (4,000) Net income \$ 6,000

Compute Gracie's degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL).

6. Rosie Mfg.earned\$100,000 this year. The company follows the residual dividend policy when paying dividends. Rosie has determined that it needs a total of \$120,000 for investment in capital budgeting projects this year. If the company's debt-to-asset ratio is 50 percent, what will its dividend payout ratio be this year?

7. Last year, the McKenna Artists retained \$100,000 of the \$250,000 net income it generated. This year, McKenna Artists generated net income equal to \$275,000. If Mc Kenna Artists follows the constant dividend payout ratio dividend policy, how much should be paid in dividends this year?

8. James Patrick Co. recently declared a 10 percent stock dividend. Prior to the stock dividend, the equity section on James Patrick Co.'s balance sheet was:

 Common stock (12,000 shares outstanding, \$2 par value) \$24,000 Additional paid-in capital 16,000 Retained earnings 10,000 Total common shareholders' equity \$50,000

James Patrick Co.'s stock currently sells for \$5 per share. Show what the equity section of the balance sheet will look like after the stock dividend is initiated.

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