Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN: 9781305506381
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
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Chapter 2, Problem 3E
To determine
To calculate: The optimal capital budget.
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Find The net present value of the project if discounted at a social discount rate of 7%.
Consider the following two projects. Both have costs of $5,000 in Year 1. Project 1 provides benefits of $2,000 in each of the first four years only. The second provides benefits of $2,000 for each of Years 6 to 10 only. Compute the net benefits using a discount rate of 6%. Repeat using a discount rate of 12 percent. What can you conclude from this exercise?
Bamboo Shack has the following capital structure:
Assets: 450,000
Debt: 105,000
Preferred Stock: 25,000
Common Stock: 320,000
The common stock is currently selling for $20 a share, pays a cash dividend of $0.85 per share, and is growing annually at 9 percent. The preferred stock pays a $11 cash dividend and currently sells for $96 a share. The debt pays interest of 10.5 percent annually, and the firm is in the 40 percent marginal tax bracket.
c. What is the cost of common stock?
d. What is the firm’s weighted-average cost of capital?
Chapter 2 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
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