Question
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$9.50 weighted averages, break points, and cost of capital.
- From Business: Finance , Economics: Financial-Markets
- Closed, but you can still post tutorials
- Due on Jan. 06, 2008
- Asked on Dec 23, 2007 at 1:43:39PM
Q:5 Questions based on the following information, dealing with weighted averages, break points, and cost of capital.
Information:
Owens Manufacturing has a capital structure composed of 40% debt and 60% common equity. Its current cost of debt is 10%, dividend payout ratio is 20%. For the current year, its management expects to realize $75,000 net income, and an additional cash flow from depreciation charges of $24,000. The firm has the following investment opportunities:
Project#1 Cost - $55,000; IRR – 12%
Project#2 Cost - $42,000; IRR – 10%
Project#3 Cost - $48,000; IRR – 9%
Project#4 Cost - $27,000; IRR – 8.5%
The current market price of the firm’s shares is $36; the firm’s tax rate is 35%. Last year the firm paid a dividend of $1.10 per share; the dividend growth rate of 6% is expected to be maintained. Floatation costs for newly issued stock are 12%. Equal risk for all projects and existing assets is assumed.
1> The firm’s weighted average cost of capital using retained earnings:
2> The firm’s weighted average cost of capital using new common stock is:
3> The firm’s break point is:
4> The cost of capital for projects C and D are, respectively:
5> All other things being equal, the firm will accept:
1: Projects 1 and 2
2: Projects 2 and 3
3: Projects 1, 2, and 3
4: Projects 1, 3, and 4
5: Projects 2, 3, and 4
6: Projects 1, 2, 3 and 4
