Suppose that the present values of the inflow from a project are less than the cost of the investment. True of False: According to capital budgeting, the project will be funded. False True Read the following passage of text and answer the following question. You just learned that the present value of future cash flows from a project is a critical component in the capital budgeting decision of whether to fund a project or not, But what discount rate should be used to discount those future cash inflows from a project? Estimating this cost of capital is an important concept in finance. Firms typically estimate a weighted average cost of capital (WAAC) in order to use to discount future cash flows in the capital budgeting proceiss. This WAAC weights the costs of various types of capital to arrive at a weighted average cost of capital. The weights used are based on the firm's target capital structure, rather than the present capital structure, when taking on new projects. When raising capital from investors, there are three major categories (or components) from which a firm can draw: debt, common stock, and preferred stock. The component cost represents the cost of that component. These component costs are the costs used in the estimation of the WAAC. Which of the following are capital components in the capital budgeting process? Chock all that apply. Debt Common stock Preferted stock Mullens estimates that it can issue debt at a rate of rd=15.00% and a tax rate of T=10.00%. It can issue preferred stock that pays a constant dividend of Dp=$10,00 per year and at Pp=$50.00 per shate. Alse, its common stock currently sells for A2=$20.00 per share. The expected dividend payment of the common stock is D1=H.00 and the dividend is expected to orow at a constant annual rate of g=5.00% per veat. Accorting to the video, the after-tax cost debt can be stated as approximately - Puooing in the values for rd and (T) vidds an atter-tax cost of debt of Mexarding to the video, the cost of prefered tack can be stated at - Mugoing in the values for Dp and Pp vilde a cost of preferred stock of of aporoximately Hint: Assume no flotation costs. Accoring to the wheo, the cost of common stock can be stated as . Puging in the values for D1,A2, and g yields a cost of coenmon stack of aporcximately Aecall that the equation for the welohted iveraoe cost of copital (WMC) can be stated as: +(KefCommenequity)(Contefcomennasequity) WAAC=(%debt)(After-taxcostofdebt)+(%ofpreferredstock)(Costofpreferredstock)+(%)Commonequity)(Costofcommonequity) Plugging in the relevant values into the formula for WACC yields a WAAC of approximately Suppose that Mullens will only accept projects with an expected rate of return that exceeds the WAAC. Which of the following projects will Mullens accept? Check all that apply. Project 1 Project 2 Project 3 Mullens estimates that it can issue dabt at a rate of r2=25.00% and a tax rate of T=15.00%. It can issue preferred stock that parvi constant dividend of Dp=$5.00 per year and xPp=$10.00 pes share. dividend is ripected to orow at a constant annoal rate of g=10.00% per wes. The after tax tost of sets is approcimately The cost ar priterted stook is apcroximately The cost of commen stock is aporodimately The waic b apcroximaty Suppose that Mullens wil inil accost projects with an expected rate of return that exceeds the wuic. Prolect : haject? Foincts
