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Capital corporation which has a target capital structure of 40% debt and 60 percent common equity is evaluating an expansion project with an 8.5 percent IRR. The project costs $6 million and any portion of it can be purchased. The firm expects to retain $4.8 million of earnings this year. It can raise up to $2 million in new debt with rd = 6%, all debt above $2 million will have rd= 8%, rs = 11% and re= 14% for any amount of new common stock that is issued. If the firms marginal tax rate is 35%, what is its optimal capital budget?

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