A new annular die process is to be installed for extruding pipes, tubes, and tubular films. The phase I installed price for the dies and machinery is $2,000,000. The manufacturer has not decided how to finance the system. The WACC over the last 5 years has averaged 9.5% per year. (a) Two financing alternatives have been defined. The first requires an investment of 40% equity funds at 9% and a loan for the balance at an interest rate of 10% per year. The second alternative requires only 25% equity funds and the balance borrowed at 10.5% per year. Which approach will result in the smaller average cost of capital? (b) Yesterday, the corporate finance committee decided that the WACC for all new projects must not exceed the 5-year historical average of 9.5% per year. With this restriction, what is the maximum loan interest rate that can be incurred for each of the financing alternatives?
A new annular die process is to be installed for extruding
pipes, tubes, and tubular films. The phase I
installed price for the dies and machinery is
$2,000,000. The manufacturer has not decided
how to finance the system. The WACC over the
last 5 years has averaged 9.5% per year.
(a) Two financing alternatives have been defined.
The first requires an investment of 40%
equity funds at 9% and a loan for the balance
at an interest rate of 10% per year. The second
alternative requires only 25% equity
funds and the balance borrowed at 10.5% per
year. Which approach will result in the
smaller average cost of capital?
(b) Yesterday, the
decided that the WACC for all new projects
must not exceed the 5-year historical average
of 9.5% per year. With this restriction, what
is the maximum loan interest rate that can be
incurred for each of the financing alternatives?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 4 images
