No-No Bad Dog (NNBD) Training School wants to maintain

No-No Bad Dog (NNBD) Training School wants to maintain its current capital structure of 50%

common equity, 10 % preferred stock, and 40 % debt. Its cost of common equity is 13%,

and the cost of preferred stock is 12%. The cost of issuing new common stock is 13.8%.

The bank charges an annual rate of interest of 11% for amounts borrowed that are less than

or equal to $1 million, and 13% for amounts between $1 million and $2 million. If more

than $2 million is borrowed, they charge a 15% annual rate of interest. No-No's tax rate is

40%. The firm expects to net $2,750,000 in income after paying preferred dividends this

year.

15. How many total break points does this No-No Bad Dog have (both debt and equity)?

A) 1

B) 2

C) 3

D) 4

16. How much total capital can NNBD raise before reaching their equity break point?

A) $2,000,000

B) $2,750,000

C) $5,000,000

D) $5,500,000

17. What is NNBD's WACC if they finance with retained earnings and borrow $900,000?

A) 6.6%

B) 10.34%

C) 11%

D) 12.1%

18. Suppose NNBD's owner leaves a pizza box on the stove in the break room. While they are

busy taking a phone call, their bloodhound steals the pizza and starts the building on fire.

The firm will need to borrow funds to rebuild their facility. This is likely to affect which of

the following?

A) Maturity

B) Coupon rate

C) Discount rate

D) Dividends

19. What is NNBD's MCC if $3,000,000 is needed for an upcoming expansion?

A) 10.34%

B) 10.82%

C) 11.30%

D) 13%

20. NNBD has the opportunity to purchase a competitor's business that will make them the only

training school within a 50-mile radius. The competitor has agreed to sell the business for

$5,005,000. What is the MCC for this project?

A) 10.34%

B) 10.82%

C) 11.30%

D) 13.9%