Question

The ABC Corporation has $300,000 of retained earnings available at a cost (kr) of 13%. If it exhausts retained earnings, it must use new common stock at a cost (kn) of 14%. Additionally, the firm expects it can raise up to $400,000 of long-term debt at a cost(ki) of 5.6%; any further use of debt will be at a cost of 8.4%. The firm can issue an unlimited number of shares of preferred stock at a cost (kp) of 10.6%. The target capital structure is 40% L-T debt, 50% common equity, and 10% preferred stock. ABC’s breaking points for WACC calculation is:____________A) $600,000B) $1,000,000C) $700,000D) Both A & B are correctE) None of the Above

Answer 1

D) Both A & B are correct

Explanation:

The computation of breaking points for WACC is shown below:-

Equity break point = Retained earnings ÷ Weight of equity

= $300,000 ÷ 50%

= $600,000

Debt break point = Debt value ÷ Weight of debt

= $400,000 ÷ 40%

= $1,000,000

Therefor we have applied the above formula to determine the WACC calculation

All other information that is mentioned in the question is not relevant. Hence, ignored it