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In optimal capital allocation process the company capital budgeting is the most determinate factor. Leveraged company always considers capital structure that would produce list weighted average cost of capital. Therefore the META BEER FACTORY manager detriment to source it capital in the following manner. 54% from Debt, 34 percent from Preferred stock and 12 percent from common stock (retained earnings). Addition to retained earnings at the end of last year was $ 124 million. The company is well structured one and he can access preferred stock from a company paid dividend at a price of 12 per share and now selling at open market at $93.00. The company borrowed new debt with 12% interest rate. The marginal tax prevalent is 40%. Besides this the company determines to reinvest dividend from existing shareholders. This stock risk free return is 8% and expected return is 14%. This family of common stock has significant risk level is 0.65. The company considers market risk to value common stock price.
Considering all relevant factors:
Question A. What is the weighted average cost of capital?
Question B. What is the retained earning breakpoint?
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