GX Corporation, a supplier of fitness equipment, is trying to decide whether to undertake any or all of the proposed projects in its investment opportunities schedule (IOS). The firm’s cost-ofcapital schedule and investment opportunities schedules follow. Cost-of-Capital Schedule Range of new financing Source Weight After-tax cost 0–Tk. 600,000 Debt 0.50 6.3% Preferred stock 0.10 12.5 Common stock 0.40 15.3 Tk.600,000– Tk.1,000,000 Debt 0.50 6.3% Preferred stock 0.10 12.5 Common stock 0.40 16.4 Tk.1,000,000 and above Debt 0.50 7.8% Preferred stock 0.10 12.5 Common stock 0.40 16.4 Investment Opportunities Schedul Investment opportunity Internal rate of return Cost Project H 14.5% Tk. 200,000 Project G 13.0 700,000 Project K 12.8 500,000 Project M 11.4 600,000 Required a. Complete the cost-of-capital schedule by calculating the WACC / WMCC schedule for thevarious ranges of new financing. b. Identify those projects that you recommend that GX Corporation undertake in the next year. c. Illustrate your recommendations by drawing a graph of GX’s weighted average costs and investment opportunities. d. Explain why certain projects are recommended and other(s) are not.
GX Corporation, a supplier of fitness equipment, is trying to decide whether to undertake any or all of the proposed projects in its investment opportunities schedule (IOS). The firm’s cost-ofcapital schedule and investment opportunities schedules follow.
Cost-of-Capital Schedule
Range of new financing Source Weight After-tax cost
0–Tk. 600,000 Debt 0.50 6.3%
Common stock 0.40 15.3
Tk.600,000– Tk.1,000,000 Debt 0.50 6.3%
Preferred stock 0.10 12.5
Common stock 0.40 16.4
Tk.1,000,000 and above Debt 0.50 7.8%
Preferred stock 0.10 12.5
Common stock 0.40 16.4
Investment Opportunities Schedul
Investment opportunity
Project H 14.5% Tk. 200,000
Project G 13.0 700,000
Project K 12.8 500,000
Project M 11.4 600,000
Required
a. Complete the cost-of-capital schedule by calculating the WACC / WMCC schedule for thevarious ranges of new financing.
b. Identify those projects that you recommend that GX Corporation undertake in the next year.
c. Illustrate your recommendations by drawing a graph of GX’s weighted average costs and investment opportunities.
d. Explain why certain projects are recommended and other(s) are not.
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