Birmingham Manufacturing presently has a capital structure consisting of 70% debt and 30% equity and the firm wishes to maintain this capital structure. In order to undertake new projects however the firm
will need to raise additional capital. The firm presently has $21000000 in retained
earnings that are available at a cost of equity of 15%. Beyond the $21000000 in retained earnings capital raised through the issuance of additional common stock will cost the
firm 20%. If the firm raises additional capital through debt the first $70000000 in debt will carry an after tax cost of 12%. Beyond $70000000 in debt the firm%u2019s after tax cost of debt would rise to 16%.
Determine the breaking points and the WMCC for the firm
Given the following 6 projects under consideration by Birmingham their respective IRR%u2019s and ICO which projects should Birmingham undertake? Justify your answer.
Project ICO IRR
1 $30000000 15%
2 $25000000 20%
3 $20000000 17%
4 $10000000 19%
5 $15000000 18%
6 $5000000 16%