Capital corporation which has a target capital structure of

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Capital Corporation, which has a target capital structure of 40 percent debt and 60 percent common equity, is evaluating an expansion project with an 8.5 percent IRR. The project costs $6 million, and any portion of it can be purchased. The firm expects to retain $4.8 million of earnings this year. It can raise up to $2 million in new debt with rd = 6%; all debt above $2 million will have rd = 8%; rs = 11%; and re = 14% for any amount of new common stock that is issued. If the firm's marginal tax rate is 35 percent, what is its optimal capital budget?

Reference no: EM13621460

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