question archive The following information pertains to the capital program of a firm:Target capital structure: 30% debt, 20% preferred stock, 50% equity
The following information pertains to the capital program of a firm:Target capital structure: 30% debt, 20% preferred stock, 50% equity
Subject:FinancePrice: Bought3
The following information pertains to the capital program of a firm:Target capital structure: 30% debt, 20% preferred stock, 50% equity.Unadjusted component costs of capitalkd = 10%kp = 12%ke = 14%Flotation Costs, Taxes, and Retained EarningsFlotation costs are 8% on common and preferred stock and zero on debtThe total effective tax rate (federal and state) is 40%Retained earnings of $1,250,000 are expected next year.Investment OpportunitiesProjectInvestmentIRRA$1 million13.0%B$2 million12.5%C$3 million11.8%D$1 million11.0%a.Adjust the component costs of capital for taxes and flotation costs, and calculate the WACC before and after the first break.b.Calculate the location of the break point.c.Sketch the MCC and the IOS on the same graph. What is the cost of capital for the year? Why?d.Which projects should the firm undertake? Why?
