Compute the wac breakpoints associated with raising new funds

Question

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

Answer 1

The break point is $800,000. At thra point you will have

 

Debt  30%   of $800,000   = $240,000

Equity 70%  of  $800,000  =  $560,000 

total                                      $800,000

 

You can not go further with out violating the 30%   70%  debt to equity ratio