Details of this Paper

The following information pertains to the capital program of a firm:

Description

solution


Question

The following information pertains to the capital program of a firm;Target capital structure: 30% debt, 20% preferred stock, 50% equity.;Unadjusted component costs of capital;kd = 10%;kp = 12%;ke = 14%;Flotation Costs, Taxes, and Retained Earnings;Flotation costs are 8% on common and preferred stock and zero on debt;The total effective tax rate (federal and state) is 40%;Retained earnings of $1,250,000 are expected next year.;Investment Opportunities;Project;Investment;IRR;A;$1 million;13.0%;B;$2 million;12.5%;C;$3 million;11.8%;D;$1 million;11.0%;a.;Adjust the component costs of capital for taxes and flotation costs, and calculate the WACC before and after the first break.;b.;Calculate the location of the break point.;c.;Sketch the MCC and the IOS on the same graph. What is the cost of capital for the year? Why?;d.;Which projects should the firm undertake? Why?;Additional Requirements;Level of Detail: Show all work

 

Paper#33097 | Written in 18-Jul-2015

Price : $37
SiteLock