Calculate the weighted average cost of capital for this firm? Compute each project’s IRR, NPV, payback, MIRR, and discounted payback. Which project(s) should be accepted if they are mutually exclusive? Explain Which project(s) should be accepted if they are independent? Explain
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
1 Assume that you are given assignment to evaluate the capital budgeting projects of the company which is considering investing in two coal projects, “Thar Coal Project” and “Sahiwal Coal Project”. The initial cost of each project is Rs. 10000 Million. Company discounts all projects based on WACC. Further, all the projects are equally risky projects, and the company uses only debt and common equity for financing these projects. It can borrow unlimited amounts at after tax interest rate of rd 5% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. The dividend for next period is Rs 4.0, its expected that they will grow at the constant growth rate of 8%, and the company’s common stock sells for 40. The tax rate is 50%.
The cash flows of both the projects are given in table below:
|
Time |
Thar Coal Project Cashflows (amount in Rs. Millions) |
Sahiwal Coal Project Cashflows (amount in Rs. Millions) |
|
0 |
- 10,000 |
- 10,000 |
|
1 |
6,500 |
3,500 |
|
2 |
3,000 |
3,500 |
|
3 |
3,000 |
3,500 |
|
4 |
1,000 |
3,500 |
Carefully analyze the above table and answer the following questions in detail.
- Calculate the weighted average cost of capital for this firm?
- Compute each project’s IRR, NPV, payback, MIRR, and discounted payback.
- Which project(s) should be accepted if they are mutually exclusive? Explain
- Which project(s) should be accepted if they are independent? Explain
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