Break points

i remember a Q in the am where it gave debt and equity proportions and debt and equity amounts and asked for the next break point where the MCC increases…can u guys remember that one? do u use the debt or equity? i just remember putting my answer as 7.1 mio

I forget what the answer was but it was the lower of the equity / Equity weight and Debt / Debt weight

yeah thats what i did i used the lower one it came out to 7.1 or sumthing can anyone verify?

I think you got tht one right !!

I definitely got this wrong because I don’t even recall this… what were the numbers?

memory serves me 70% equity 30% debt equity amount 5 mio debt amount 8 mio therefore 5/0.7 = 7.1 mio and 8/0.3 = 26.7 mio choices were a. 5 mio b. 8 mio c. 7.1 mio d. 26.7 mio

c is right. tricky one. i first calculated the fixed income then changed during my review

yes! i think i got this right.

yeah i got 7.1 for sure it’s right.

I forgot the rule. So I just went with 7.1 because as a manager, in most situations, I would rather raise equity over debt. Not sure if I was, right or wrong. I just went with my gut.

I vote for 7.1

If you raise 7.1M of total capital, 2.13 is charged to debt and 4.97 is charged to equity…therefore at none of these amounts is the cost of debt/equity going to increase as none of the break points have been met. It will occur if you raise 26.7 (8.01 debt and 18.69 equity) and your cost of debt will increase but cost of equity will stay the same. What do you guys think? I hope I didn’t read the question incorrectly

was the question about finding the next break point or the amount of capital that increases the WACC?

those 2 are the same thing…

the next break point is 7.1 (debt) but the amount of capital that increases the WACC is 26.7…not the same thing

the point at which the cost of equity capital increases is when total capital reaches 7.1 million. this increases the company’s cost of total capital (only the equity cost is increasing). at 26.7 mill, the cost of debt capital increases, and this will also increase the cost of total capital. (at 7.1 mill, the cost of equity capital had already increased, and this will further increase the WACC). the question asked us to find the break point at which the cost of capital increases. same thing.

the break point represents the point at which the cost of any one factor of the WACC changes. If one factor changes (i.e. equity in this case) then the total WACC changes as well.

exactly thank you thechad.

point taken…cheers for the clarification