Question
18. You are evaluating next year investment opportunities and your company cost of capital. You anticipate that if you could minimize your cost, more feasible
18. You are evaluating next year investment opportunities and your company cost of capital. You anticipate that if you could minimize your cost, more feasible projects could be undertaken. You are also able to determine your capital budget for next year. Opportunities available are as follows:
Projects Rate of Return
-
A 13%
-
B 12%
-
C 15%
-
D 14%
-
E 11%
You believe your current capital structure is optimal and even if you would have to raise new funds, this proportion will be maintained:
LT Debts 50% Pref. Stock 10% Com. Stock 40%
Your company can issue unlimited amount of 9% semi-annual coupon bond with 10 years maturity period. Bonds will be issued at par but a 2.5% flotation cost will be incurred.
You can sell new 9% $100 par value preferred stock for $95 per share. Flotation cost is $10 per share.
Forthcoming dividend is expected to be $1.25, dividend expected to grow at a constant rate of 4% and common shares is selling for $11. The company expects $320,000 in retained earnings and cost of issuing new common stock is $1.00. Your tax rate is 40%.
Which investment/s, if any, would you recommend? Use the WMCC/IOS to explain.
(Hint: Determine the following: Cost of capital components; Breakpoints; WACC at various level of breakpoints; Projects accepted and total amount of capital budget; WACC for the planning period)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started