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Fans by Fay Company has a capital structure of 60 percent debt and 40 percent common equity. The company expects to realize $200,000 in net income this year and will pay no dividends. The effective annual interest rate on its new borrowings increases by 3 percent for amounts over $500,000.
a. At what capital budget size will Fans by Fay’s cost of equity increase?
b. In other words, what is its equity break point? At what capital budget size will its cost of debt increase

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