Question
Babe's Dog Obedience School , Inc., wants to maintain its current capital structure of 50 percent common equity, 10 percent preferred stock, and 40 percent
Babe's Dog Obedience School , Inc., wants to maintain its current capital structure of 50 percent common equity, 10 percent preferred stock, and 40 percent debt. Its cost of common equity is 13 percent, and the cost of preferred stock is 12 percent. The bank's effective annual interest rate is 11 percent for amounts borrowed that are less than or equal to $1 million and 13 percent for amounts between $1 million and $2 million. If more than $2 million is borrowed, the effective annual interest rate charged is 15 percent. Babe's tax rate is 40 percent. The firm expects to realize $2,750,000 in net income this year after preferred dividends have been paid. The current price per share of Babe's common stock is $44.23, the expected dividend per share is $4.20, the expected growth rate is 4 percent. If Babe needs to issue new common stock, the flotation cost is 5 percent of share price. Here are the investment opportunity options that Babe is considering: Project A requires an initial investment of $900,000. The expected rate of return for Project A is 11.75%. Project B requires an initial investment of $2,100,000. The expected rate of return for Project B is 11.50%. Project C requires an initial investment of $2,100,000. The expected rate of return for Project C is 11.40%. Project D requires an initial investment of $9,000,000. The expected rate of return for Project D is 11.00%.
**Express all of percentage answers to two (2) decimal places.**
a. Calculate the first debt break point.
b. Calculate the second debt break point.
c. Calculate the equity break point.
d. Calculate the highest MCC for Project A only.
e. Calculate the highest MCC for Projects A and B.
f. Calculate the highest MCC for Projects A, B, and C,
g. Calculate the highest MCC for Projects A, B, C, and D.
h. Based on your analysis, which project(s) would you recommend that Babe undertake?
12.00 |Project A Return -11.75% IOS Schedule 11.75% MCC Schedule 11.50% Project B Return 11.50% Project C Return 11.40% r 11.25% 1.00% 10.75% MCC T Project D Return 11.00% -se 0.50% MCC 10.25 10.00 $0 $500 $1000 $1500 $2000 $2500 $3000 $3500 $4000 $4500 $5000 $5500 $6000 Capital Budget Size (1000sStep 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