Question:

Pannonia Enterprises, Inc. (PEI) has a target capital structure of 40% debt with 60% equity. PEPs pretax cost of debt will remain at 9% until the firm raises more than $200,000 in new debt capital, at which point its pretax cost of debt will increase to 9.5%. PEPs cost of equity will increase when more than $400,000 in equity capital is raised. PEPs break point for debt capital is closest to:

A $500,000.

explanation

Capital component breakpoint = value at which component’s cost of capital changes / component’s weight WACC
Debt breakpoint = 200.000/0.40=500.000