Fundamentals of Financial Management, Concise Edition (MindTap Course List)
9th Edition
ISBN: 9781305635937
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 12, Problem 5P
OPTIMAL CAPTTAL 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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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
15.00Â Â Â
3
 5,000
13.75Â Â Â
4
 2,000
12.50Â Â Â
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…
Project Selection Midwest water works estimates that is WACC is 10.5%. The company is considering the following capital budgeting prokects:
ProjectÂ
SizeÂ
Rate of Return
A
$1 million
12.0%
Â
Â
Â
B
2 MillionÂ
11.5
Â
Â
Â
c
2 millionÂ
11.2
D
2 millionÂ
11.0
Â
Â
Â
E
1 millionÂ
10.7
Â
Â
Â
FÂ
1 millionÂ
10.3
Â
Â
Â
GÂ
1 MillionÂ
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.
CAPITAL BUDGETING - MINI CASE STUDY
Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are shown. Each investment has a 6-year expected useful life and no salvage value.
Â
Â
Payback Period
IRR
Investment Cost
Project A1
4.2
10.5%
$130,000
Project B2
5.9
5.1%
              67,000
Project C3
5.0
13.4%
              83,000
Project D4
4.8
7.4%
              61,000
Project E5
3.2
12.1%
            115,000
Project F6
4.0
9.9%
              65,000
Project G7
6.3
9.8%
              76,000
Â
Identify…
Chapter 12 Solutions
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Ch. 12 - Prob. 1QCh. 12 - Prob. 2QCh. 12 - Explain why net operating working capital is...Ch. 12 - Why are interest charges not deducted when a...Ch. 12 - Prob. 5QCh. 12 - What are some differences in the analysis for a...Ch. 12 - Distinguish among beta (or market) risk,...Ch. 12 - Prob. 8QCh. 12 - Prob. 9QCh. 12 - If you were the CFO of a company that had to...
Ch. 12 - Prob. 11QCh. 12 - REQUIRED INVESTMENT Tannen Industries is...Ch. 12 - PROJECT CASH FLOW Colsen Communications is trying...Ch. 12 - Prob. 3PCh. 12 - REPLACEMENT ANALYSIS The Oviedo Company is...Ch. 12 - OPTIMAL CAPTTAL BUDGET Marble Construction...Ch. 12 - DEPRECIATION METHODS Charlene is evaluating a...Ch. 12 - SCENARIO ANALYSIS Huang Industries is considering...Ch. 12 - NEW PROJECT ANALYSIS You must evaluate the...Ch. 12 - NEW PROJECT ANALYSIS You must evaluate a proposal...Ch. 12 - REPLACEMENT ANALYSIS The Dauten Toy Corporation...Ch. 12 - REPLACEMENT ANALYSIS St. Johns River Shipyards is...Ch. 12 - PROJECT RISK ANALYSIS The Butler-Perkins Company...Ch. 12 - SCENARIO ANALYSIS Your firm, Agrico Products, is...Ch. 12 - NEW PROJECT ANALYSIS Holmes Manufacturing is...Ch. 12 - REPLACEMENT ANALYSIS The Darlington Equipment...Ch. 12 - REPLACEMENT ANALYSIS The Bigbee Bottling Company...Ch. 12 - ABANDONMENT OPTION The Sorensen Supplies Company...Ch. 12 - OPTIMAL CAPITAL BUDGET Hampton Manufacturing...Ch. 12 - NEW PROJECT ANALYSIS You must analyze a potential...Ch. 12 - INTEGRATED CASE ALLIED FOOD PRODUCTS CAPITAL...
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