Question
Your company is evaluating two projects and has collected the following information: Project A Project B Expected return (IRR) 12% 7% Risk Same as existing
Your company is evaluating two projects and has collected the following information:
Project A | Project B | |
Expected return (IRR) | 12% | 7% |
Risk | Same as existing business | Same as existing business |
Suggested source of financing | Equity | Long-term debt |
After-tax cost of financing | 16% | 5% |
The company currently has a capital structure consisting of 50% equity and 50% long-term debt.
Without doing any calculations, what should the company do and why?
Accept only project B, since its expected return is greater than its cost of financing
Accept only project B, since its cost of financing is less than project A's
Accept both projects, since they are not riskier than the existing business
Accept only project A, since its expected return is greater than project B's
Look for a better reason to make a decision
Reject both projects, since their expected returns are too low
What is the firm's overall (after-tax) cost of capital?
What should the firm do?
Accept project A and reject project B
Accept project B and reject project A
Reject both projects
Something else
Accept both projects
Submit
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