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Avoiding Derivative Issuance

The common stock of ABC has a beta of 1.20. The risk-free rate is 5 percent, and the market risk premium (Km - Krf) is 6 percent. This year's addition to retained earnings is $3,000,000. The company's capital budget is $4,000,000 and its target capital structure is 50 percent debt and 50 percent equity.

How large of a capital budget can the company have without resorting to the issuance of additional common stock or changing its capital structure?

What is the company's cost of equity capital?

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Target capital structure = 50% debt
Retained earnings for the ...

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