Bundle: Fundamentals of Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
14th Edition
ISBN: 9781305777118
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 13, Problem 2P
OPTIMAL CAPITAL BUDGET Marble Construction estimates that its WACC is 10% if equity comes from
| Project | Size | |
| A | $650,000 | 14.0% |
| B | 1,050,000 | 13.5 |
| C | 1,000,000 | 11.2 |
| D | 1,200,000 | 11.0 |
| E | 500,000 | 10.7 |
| F | 650,000 | 10.3 |
| G | 700,000 | 10.2 |
Assume that each of these projects is independent and that each is just as risky as the firm’s existing assets. Which set of projects should be accepted, and what is the firm’s optimal capital budget?
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Project Selection Midwest water works estimates that is WACC is 10.5%. The company is considering the following capital budgeting prokects:
Project
Size
Rate of Return
A
$1 million
12.0%
B
2 Million
11.5
c
2 million
11.2
D
2 million
11.0
E
1 million
10.7
F
1 million
10.3
G
1 Million
10.2
Assume that each of these projects is just as risky as the firm's existing assests and that the firm may accept all the projects or only some of them which set of projects should be accepted?
Explain.
WACC AND OPTIMAL CAPITAL BUDGET
Adamson Corporation is considering four average-risk projects with the following costs and rates of return:
Project
Cost
Expected Rate of Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $6 per year at $59 per share. Also, its common stock currently sells for $40 per share; the next expected dividend, D1, is $4.00; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.
What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations.Cost of debt %Cost of preferred stock %Cost of retained earnings %
What is Adamson's WACC? Round your answer to two decimal places. Do not round…
Revenues generated by a new fad product are forecast as follows:
Year
Revenues
1
60,000
2
40,000
3
30,000
4
10,000
Thereafter
0
Expenses are expected to be 30% of revenues, and working capital required in each year is expected to be 10% of revenues in the following year. The product requires an immediate investment of $81,000 in plant and equipment.
a). What is the inital investment in the product? Rememebr working capital.
b).If the plant and equipment are depreciated over 4 years to a slavage value of zero using straight-line depreciation, and the firm's tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years.
c). If the opportunity cost of capital is 10%, what is the project's NPV?
d). What is the project IRR?
Chapter 13 Solutions
Bundle: Fundamentals of Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
Ch. 13 - Explain in general terms what each of the...Ch. 13 - Would a failure to recognize growth options tend...Ch. 13 - Companies often have to increase their initial...Ch. 13 - How might a firms corporate WACC be affected by...Ch. 13 - Prob. 5QCh. 13 - GROWTH OPTION Martin Development Co. is deciding...Ch. 13 - OPTIMAL CAPITAL BUDGET Marble Construction...Ch. 13 - INVESTMENT TIMING OPTION Digital Inc. is...Ch. 13 - ABANDONMENT OPTION The Scampini Supplies Company...Ch. 13 - OPTIMAL CAPITAL BUDGET Hampton Manufacturing...
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