Question
1) a. Capital budgeting is a complex process which may be divided into phases. Identify and describe the phases of capital budgeting. [18 marks] b.
1) a. Capital budgeting is a complex process which may be divided into phases. Identify and describe the phases of capital budgeting. [18 marks] b. Distinguish between Company Cost of Capital and Project Cost of Capital and explain the conditions that should be satisfied for using a firm's WACC for evaluating new investments or projects. [7 marks] The cost of capital is affected by several factors, some beyond the control of the firm and others dependent on the investment and financing policies of the firm. Discuss these factors that affect the weighted average cost of capital.(13 marks) c. Frenzi Communications Inc. (FCI) has the following capital structure, which it considers to be optimal: debt = 25%, preferred stock = 15%, and common stock = 60%. FCIs tax rate is 40%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. FCI paid a dividend of Gh3.70 per share last year (D0), and its stock currently sells at a price of Gh60 per share. Ten-year Treasury bonds yield 6%, the market risk premium is 5%, and FCIs beta is 1.3. The following terms would apply to new security offerings. Preferred: New preferred could be sold to the public at a price of Gh100 per share, with a dividend of Gh9. Flotation costs of Gh5 per share would be incurred. Debt: Debt could be sold at an interest rate of 9%. Common: New common equity will be raised only by retaining earnings. i. Find the component costs of debt, preferred stock, and common stock. (8 marks) ii. What is the WACC? [4 marks] (Total 50 marks
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