Question
BKOOL Limited has four investment projects with the following costs and expected rates of return. All projects are independent of each other. COST RATE OF
BKOOL Limited has four investment projects with the following costs and expected rates of return. All projects are independent of each other. COST RATE OF RETURN Project P $12 000 15.20% Project Q $13 000 12.40% Project R $15 000 11.75% Project S $12 000 16.5% The firm forecasted that it can issue debt at a before tax cost of 12%. Its tax rate is 25% and it can issue preferred stock at $50 per share which pays constant dividend of $6 per year. BKOOLs stock currently sells for $40 per share. Next years dividend is expected to be $4.50 (D1) and is expected to grow at a constant rate of 7%. The companys capital structure consists of 70% common stock, 15% debt and 15% preferred stock. A. Calculate the cost of each capital component. (12 marks) B. Compute BKOOLs weighted average cost of capital. (6 marks) C. If all projects are of average risk, which should the firm select? (2 marks)
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