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
Problem 1PS
Related questions
Question
answer problem with all necessary computation
A, B and C
Transcribed Image Text:Luv Yah, vice president of LabDiscount Stores has decided which of the following
fiove projects should be accepted by her company:
Project
Investment cost
Internal rate of return
LOVE
P200,000
100,000
175,000
100,000
150,000
26% p.a.
12%
18%
22%
16%
Y
The company finances all expansion with 30% debts and 70% equity capital. The cost
of debt (before tax) is 10% for the first P100,000. The cost of any additional debt is
14%. The company's common stock is currently selling for P50 per share. Flotation
costs are 15% of the selling price. The company's growth rate in earnings per share is
anticipated to continue at a constant rate of 12% per year. The company's earnings
per share this year was P5.50. The company pay out is 60%. The company has
P170,000 of internal funds available for investment purposes.
Required:
a. What is the WACC for the first P100,000 of debt and P170,000 equity?
b. Assuming debt is more than P100,000 land equity is more than P170,000, what is WACC?
c. Which projects to be accepted? Why?
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