Question

If a firm has a $500,000 debt limit before AT kd will change, taxes are 30% and total debt is 50% of the capital structure, calculate the debt break point in the MCC schedule.

a.
$2,500,000

b.
$1,000,000

c.
$300,000

d.
$500,000

Answer 1

option (b) $1,000,000

Step-by-step explanation:

Data provided in the question:

Debt limit of the firm = $500,000

Tax rate = 30%

Total debt i.e weight of debt = 50% of capital

Now,

Debt break point = ( Amount of debt ) ÷ ( Weight of debt )

or

Debt break point = $500,000 ÷ 50%

or

Debt break point = $500,000 ÷ 0.50

or

Debt break point = $1,000,000

Hence,

the answer is option (b) $1,000,000