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problem: What does a company's cost of capital represent and how is it find outd? How do market prices and the company's perceived market risk impact its cost of capital, & how does the company's debt to equity mix impact this cost of capital? Apply the information provided; make a spreadsheet to compute weighted average cost & marginal weighted average cost of capital for Strident Marks?

You have developed the following table concerning the cost of capital sources for Strident Marks:

Source of capital

After tax cost

Long term debt

6%

Preferred stock

18%

Common stock equity

20%

Strident Marks capital structure weights used to find out its WACC are:

Source of Capital

After Tax Cost

Amount Available

After tax cost, After Break Point

Long term debt

6%

200,000

12%

Preferred stock

18%

100,000

25%

Common stock equity

20%

200,000

40%

The future investment opportunities & the corresponding Internal Rate of Return [IRR] follow. As a result of operating its business operations profitably, Strident Marks has 1,000,000 dollar to invest. Considering Strident Marks' weighted average cost of capital & MCC, rank the investment opportunities & indicate which ones would be accepted, which [if any] would be rejected & why.

Investment Opportunity

IRR

Initial Investment

A

20%

$300,000

B

16%

$350,000

C

23%

$300,000

D

15%

$450,000

E

24%

$250,000

F

14%

$400,000

G

22%

$200,000

H

18%

$150,000

I

17%

$100,000

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M918951

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