Fruit Transgenics Engineering is contemplating the purchase of its rival. One of FTE’s genetics engineers is interested in the financing strategy of the buyout. He learned of two plans. Plan A requires 50% equity funds from FTE retained earnings that currently earn 9% per year, with the balance borrowed externally at 6%, based on the company’s excellent stock rating. Plan B requires only 20% equity funds with the balance borrowed at a higher rate of 8% per year.a. Which plan has the lower average cost of capital?b. If the current corporate WACC of 8.2% will not be exceeded, what is the maximum cost of debt capital allowed for each plan? Are these rates higher or lower than the current estimates?
Fruit Transgenics Engineering is contemplating the purchase of its rival. One of FTE’s genetics engineers is interested in the financing strategy of the buyout. He learned of two plans. Plan A requires 50% equity funds from FTE retained earnings that currently earn 9% per year, with the balance borrowed externally at 6%, based on the company’s excellent stock rating. Plan B requires only 20% equity funds with the balance borrowed at a higher rate of 8% per year.a. Which plan has the lower average cost of capital?b. If the current corporate WACC of 8.2% will not be exceeded, what is the maximum cost of debt capital allowed for each plan? Are these rates higher or lower than the current estimates?
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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Fruit Transgenics Engineering is contemplating the purchase of its rival. One of FTE’s genetics engineers is interested in the financing strategy of the buyout. He learned of two plans. Plan A requires 50% equity funds from FTE retained earnings that currently earn 9% per year, with the balance borrowed externally at 6%, based on the company’s excellent stock rating. Plan B requires only 20% equity funds with the balance borrowed at a higher rate of 8% per year.
a. Which plan has the lower average cost of capital?
b. If the current corporate WACC of 8.2% will not be exceeded, what is the maximum cost of debt capital allowed for each plan? Are these rates higher or lower than the current estimates?
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