conductor company. In order to accomplish this, it is considering two options that both require ra arge amount of funds. First option (Project X) is the construction of a factory building and acquis nachineries for an estimated cost of P30 million. The other alternative (Project Y) is the acquisitic existing company that manufactures the same tool at a price of P50 million. n order to fund the project, the Company will have to apply for a loan from a bank and issue shar tocks. The management contemplated a more leveraged approach by availing the 70% of the fin equirements through loan borrowing and the rest from the issuance of shares. The interest on ba s at 11% per annum while the issuance of shares will require return to stockholders at 8% per an The applicable income tax rate is 25%. Both of the projects will have estimated life of 10 years with no salvage value. The following are nformation on the related revenues and expenses of the two projects

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
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1. CASE STUDY
Giangelo Corporation would like to venture in manufacturing a specialized tool that is required by a semi-
conductor company. In order to accomplish this, it is considering two options that both require raising
large amount of funds. First option (Project X) is the construction of a factory building and acquisition of
machineries for an estimated cost of P30 million. The other alternative (Project Y) is the acquisition of an
existing company that manufactures the same tool at a price of P50 million.
In order to fund the project, the Company will have to apply for a loan from a bank and issue shares of
stocks. The management contemplated a more leveraged approach by availing the 70% of the financial
requirements through loan borrowing and the rest from the issuance of shares. The interest on bank loan
is at 11% per annum while the issuance of shares will require return to stockholders at 8% per annum.
The applicable income tax rate is 25%.
Both of the projects will have estimated life of 10 years with no salvage value. The following are the
information on the related revenues and expenses of the two projects.
Project X
excluding interest
Annual revenue
Annual cash cost and expenses
O 8.175
9
5.125
06
P 12,700,000
P 20,000,000
Required:
1. Determine the Weighted Average Cost of Capital (Round off to whole percentage value)
P18,000,000
Project Y
P30,000,000
Transcribed Image Text:1. CASE STUDY Giangelo Corporation would like to venture in manufacturing a specialized tool that is required by a semi- conductor company. In order to accomplish this, it is considering two options that both require raising large amount of funds. First option (Project X) is the construction of a factory building and acquisition of machineries for an estimated cost of P30 million. The other alternative (Project Y) is the acquisition of an existing company that manufactures the same tool at a price of P50 million. In order to fund the project, the Company will have to apply for a loan from a bank and issue shares of stocks. The management contemplated a more leveraged approach by availing the 70% of the financial requirements through loan borrowing and the rest from the issuance of shares. The interest on bank loan is at 11% per annum while the issuance of shares will require return to stockholders at 8% per annum. The applicable income tax rate is 25%. Both of the projects will have estimated life of 10 years with no salvage value. The following are the information on the related revenues and expenses of the two projects. Project X excluding interest Annual revenue Annual cash cost and expenses O 8.175 9 5.125 06 P 12,700,000 P 20,000,000 Required: 1. Determine the Weighted Average Cost of Capital (Round off to whole percentage value) P18,000,000 Project Y P30,000,000
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