 # what is the next breakpoint?

70%equity, 30%debt, equity amount 5 mio, debt amount 8 mio, what is the next breakpoint? Choices are a.5 mio, b. 8 mio, c.7.1mio, d. 26.7mio Ans is c, but how to reach this ans? Many thanks in advance!

The first breakpoint is where either one of the components changes cost - this happens when the entire amount under one of sources crosses the threshold. Say you use all 5mil of equity. If you’re not intending to change the capital structure (the proportion of equity and debt), this means that the 5 mil represent 70% of your financing: 5mil=70%=> 100 financing would be 5mil/70%=7.14, say answer C, 7.1. The second alternative would be: use entire amount of debt, this means 8mil=30% and the entire financing would be 8mil/30%=26.67mil, of which only 8 are debt, the rest of 18.67 would be equity, which is crossing the equity threshold by 13.67 (that is 18.67-5), meaning beyond a breaking point.

cheers for explanation and got it now:-)

Where do you get these questions you’re posting lately? Seem straight out of the exam in the summer, at least this one.

I took the June exam and failed:-( These questions are the items discussed in forum immediately after the exam date, wrote them down but still find I am confusing about them…