Use the following scenario to solve A-C. H2X Incorporated has accounts payable of $400,000 (a typical amount for the company, non-interest bearing), a bank loan of $700,000 at 9% interest rate, a bank loan of $1,000,000 at 6.5% interest rate, and equity of $2,800,000. Its income tax rate is 32%. Management estimates the company’s cost of equity is 14%. A. What is the company’s weighted average cost of capital on non-interest-bearing debt, interest bearing debt, and equity (or total invest capital)? a. 11% b. 10% c. 9% d. 12% B. Company managers are considering selling more stock to raise $500,000 of new equity to purchase $500,000 of new manufacturing equipment. What would the new weighted average cost of capital be if this plan were implemented? a. 10% b. 12% c. 9% d. 11% C. Company managers are projecting that the new manufacturing equipment from question 15 will produce a return on assets of 11%. Should the company proceed with this plan? a. No, because the cost of capital is greater than the projected return on the new manufacturing equipment b. Yes, because the current stockholders want to increase their individual percentage ownership interests in the company c. Yes, because the return on the new manufacturing equipment is greater than the cost of capital d. Yes, because the company needs the extra capacity

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter9: Accounting For Receivables

Section: Chapter Questions

Problem 4TP: You are considering two possible companies for investment purposes. The following data is available...

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Use the following scenario to solve A-C.

H2X Incorporated has accounts payable of $400,000 (a typical amount for the company, non-interest bearing), a bank loan of $700,000 at 9% interest rate, a bank loan of $1,000,000 at 6.5% interest rate, and equity of $2,800,000. Its income tax rate is 32%. Management estimates the company’s cost of equity is 14%.

A. What is the company’s weighted average cost of capital on non-interest-bearing debt, interest bearing debt, and equity (or total invest capital)?

a. 11%

b. 10%

c. 9%

d. 12%

B. Company managers are considering selling more stock to raise $500,000 of new equity to purchase $500,000 of new manufacturing equipment. What would the new weighted average cost of capital be if this plan were implemented?

a. 10%

b. 12%

c. 9%

d. 11%

C. Company managers are projecting that the new manufacturing equipment from question 15 will produce a return on assets of 11%. Should the company proceed with this plan?

a. No, because the cost of capital is greater than the projected return on the new manufacturing equipment

b. Yes, because the current stockholders want to increase their individual percentage ownership interests in the company

c. Yes, because the return on the new manufacturing equipment is greater than the cost of capital

d. Yes, because the company needs the extra capacity

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