. What is Scott Inc.'s WACC assuming they can use retained earnings to fund their capital udget? . Scott Inc. is reviewing the projects below. Assume these projects are independent and have similar levels of risk. Using the WACC you calculated previously, which of the followi projects should be accepted? Why? Project 1 B Return (IRR) 10.50% 11.00% 7.00%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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This is a multipart problem. Students must complete each part to receive full credit. Also,
students must detail all steps and calculations. Zero credit will be awarded if you do not
detail all of your steps and calculations.
Scott Inc. has a target capital structure consisting of 50% debu, 20% preferred stock, and 30%
common stock. Scott Inc. issued 10-year 6.2% semiannual coupon bonds that sell for $905.
Scott Inc. also has 1 million preferred shares outstanding with a dividend rate of 9.75%, a face
value of $100, and a selling price of $115. Additionally, Scott Inc. has 6 million common
shares outstanding and is a constant growth firm that expects to pay a dividend of $2.05 on
their common stock. Scott Inc.'s common stock currently sells for $24.50 per share and has a
growth rate of 4%. Flotation costs on new common stock would be 10% and the firm's
marginal tax rate is 25%.
a. What is Scott Inc.'s WACC assuming they can use retained earnings to fund their capital
budget?
b. Scott Inc. is reviewing the projects below. Assume these projects are independent and
have similar levels of risk. Using the WACC you calculated previously, which of the following
projects should be accepted? Why?
Project
A
B
C
D
E
F
Return (IRR)
10.50%
11.00%
7.00%
8.50%
9.00%
8.00%
Transcribed Image Text:This is a multipart problem. Students must complete each part to receive full credit. Also, students must detail all steps and calculations. Zero credit will be awarded if you do not detail all of your steps and calculations. Scott Inc. has a target capital structure consisting of 50% debu, 20% preferred stock, and 30% common stock. Scott Inc. issued 10-year 6.2% semiannual coupon bonds that sell for $905. Scott Inc. also has 1 million preferred shares outstanding with a dividend rate of 9.75%, a face value of $100, and a selling price of $115. Additionally, Scott Inc. has 6 million common shares outstanding and is a constant growth firm that expects to pay a dividend of $2.05 on their common stock. Scott Inc.'s common stock currently sells for $24.50 per share and has a growth rate of 4%. Flotation costs on new common stock would be 10% and the firm's marginal tax rate is 25%. a. What is Scott Inc.'s WACC assuming they can use retained earnings to fund their capital budget? b. Scott Inc. is reviewing the projects below. Assume these projects are independent and have similar levels of risk. Using the WACC you calculated previously, which of the following projects should be accepted? Why? Project A B C D E F Return (IRR) 10.50% 11.00% 7.00% 8.50% 9.00% 8.00%
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