Mrkt Val of Debt Mrkt Val of PS Mrkt Val of Equity Total Market Val WACC Required Return of Pre Stock $466,336,275.63 2.79% $2,000,000,000 11.97% $14,243,478,260.87 85.24% $16,709,814,536.49 100% 14.21 10% Portion of the Balance Sheet for ABC Company as of December 31, 2021. Long-term debt (bonds, at par) Preferred Stock (par $5) Common Stock (par value $1) Paid-In-Capital Retained earnings Total debt and equity $500,000,000 $200,000,000 $350,000,000 $100,000,000 $250,000,000 $1,400,000,000 ABC has three divisions. One is in athletic wear, one in snowboard equipment, and the last one in fashion wear. The company has identified comparable companies in these lines of business whose stocks are publicly traded. ABC has estimated that the systematic risks of its three divisions based on these comparable companies as shown in Table 2. ABC has a beta of 1.2 with the expected return on market index of 11% and risk-free rate of 5%. Table-2 shows the six projects (below) that are in each division and their risk class that are different than the company. 1. Which projects should be accepted with the corporate cost of capital? 2. Which projects are accepted with the project's cost of capital? 3. What would be the beta of the company if ABC adopts all profitable project based on your selection of the project in Part-2 2? 4. Graph the result of sections (1) and (2) and discuss the results. Projects 1 2 3 4 5 Division IRR Graphics 17% Paint 18% Graphics 16% Paint 13% Leisure 10% Leisure 16% Total Investments Beta 2.2 1.7 1.3 1 1.1 Investment $10,000,000 $20,000,000 $15,000,000 $25,000,000 $30,000,000 $20,000,000 $120,000,000 6 1.2 Mrkt Val of Debt Mrkt Val of PS Mrkt Val of Equity Total Market Val WACC Required Return of Pre Stock $466,336,275.63 2.79% $2,000,000,000 11.97% $14,243,478,260.87 85.24% $16,709,814,536.49 100% 14.21 10% Portion of the Balance Sheet for ABC Company as of December 31, 2021. Long-term debt (bonds, at par) Preferred Stock (par $5) Common Stock (par value $1) Paid-In-Capital Retained earnings Total debt and equity $500,000,000 $200,000,000 $350,000,000 $100,000,000 $250,000,000 $1,400,000,000 ABC has three divisions. One is in athletic wear, one in snowboard equipment, and the last one in fashion wear. The company has identified comparable companies in these lines of business whose stocks are publicly traded. ABC has estimated that the systematic risks of its three divisions based on these comparable companies as shown in Table 2. ABC has a beta of 1.2 with the expected return on market index of 11% and risk-free rate of 5%. Table-2 shows the six projects (below) that are in each division and their risk class that are different than the company. 1. Which projects should be accepted with the corporate cost of capital? 2. Which projects are accepted with the project's cost of capital? 3. What would be the beta of the company if ABC adopts all profitable project based on your selection of the project in Part-2 2? 4. Graph the result of sections (1) and (2) and discuss the results. Projects 1 2 3 4 5 Division IRR Graphics 17% Paint 18% Graphics 16% Paint 13% Leisure 10% Leisure 16% Total Investments Beta 2.2 1.7 1.3 1 1.1 Investment $10,000,000 $20,000,000 $15,000,000 $25,000,000 $30,000,000 $20,000,000 $120,000,000 6 1.2
