Page 198 - DMGT521_PROJECT_MANAGEMENT

Unit 11: Project Cash Flow

it can raise with the help of only 11% and 12% debt. We know the following is Notes
true:

3,600,000
0.6T = 3,600,000 T = = $6,000,000
3 3 0.6
From the above, we know that STN can raise up to $6,000,000 in capital with
the help of issuing only 11% and 12% debt.

Break Point 4: When STN has to lower the price of its new stock from $16 to $14 per share.
It is important to remember that when a firm lowers its stock price, it represents
a rise in its cost of new common stock because it is not getting as much money
from each share of new common stock as it can before.
We will let T be the maximum amount of capital STN can raise without
4
lowering its new stock price to $14 per share. STN can raise a total of $200,000
and keep its new stock price at $16. However, it is important to remember that
the $16 stock is not the only equity used to help raise T . STN has already
4
exhausted $1,890,000 of retained earnings before issuing new common stocks.
Hence the amount of equity in T is $2,090,000 (=$1,890,000+$200,000). As a
4
result, we know the following is true:
20,900,000
0.4 × T = $2,090,000 T = = $5,225,000
4 4 0.4
From the above calculation, we know that STN can raise up to $5,225,000 in
capital with the help of using only retained earnings and $16 stocks.

The break points we have discovered are not in the correct order. The following table summarizes
the break points:

Table 11.3: Break Points

Events Leading to the Break Points Break Points
1. Exhausting all the retained earnings $4,725,000
2. Going from 12% debt to 14% debt 3,000,000
3. Going from 12% debt to 14% debt 6,000,000
4. Lowering price of new common stocks from $8.59 to $7.63 5,225,000

Using the table above as the guideline, we can break the MCC schedule into 5 intervals. It is
important that we identify the types of capital use in each interval.

Table 11.4: Intervals in MCC Schedule

Interval Instruments Used Break Point
1 Retained earnings and 11% debt
2 Retained earnings and 12% debt $3,000,000
3 $16 common stocks and 12% debt 4,725,000
4 $14 common stocks and 12% debt 5,225,000
5 $14 common stocks and 13% debt 6,000,000

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