Gohan Incorporation has to decide which of the following four projects should be selected Project Sadako Nezuko Keiko Tomako Initial Investment RM225.000 HM150.000. RM250,000 RM125,000 Internal Rate of Return (%) 14 17 12 The company's capital structure consists of RM224, 000 debt. RM160, 000 in preferred share and RM256, 000 in common equity. The company has RM150, 000 retained earnings available for investment purposes. The cost of debt before taxed is 12% for the first RM180, 000. The cost of any additional debt before taxes is 15% The company's expected dividend is RM2 50 per share. The current market price of common share is RM22. The expected growth rate in earnings and dividends is 7% If new common stock are issued, there will be floatation cost of 8% of the selling price. The after tax cots of preferred share is 10 % for the first RM150. 000 and above that it will be 12%. The corporate tax rate is 30 percent. a) Calculate the after tax cost for debt and common share b) Construct the Investment Opportunity Schedule (IOS) graph c) Which projects should Gohan Incorporation undertake and why?

Gohan Incorporation has to decide which of the following four projects should be selected Project Sadako Nezuko Keiko Tomako Initial Investment RM225.000 HM150.000. RM250,000 RM125,000 Internal Rate of Return (%) 14 17 12 The company's capital structure consists of RM224, 000 debt. RM160, 000 in preferred share and RM256, 000 in common equity. The company has RM150, 000 retained earnings available for investment purposes. The cost of debt before taxed is 12% for the first RM180, 000. The cost of any additional debt before taxes is 15% The company's expected dividend is RM2 50 per share. The current market price of common share is RM22. The expected growth rate in earnings and dividends is 7% If new common stock are issued, there will be floatation cost of 8% of the selling price. The after tax cots of preferred share is 10 % for the first RM150. 000 and above that it will be 12%. The corporate tax rate is 30 percent. a) Calculate the after tax cost for debt and common share b) Construct the Investment Opportunity Schedule (IOS) graph c) Which projects should Gohan Incorporation undertake and why?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 7P

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44. Subject :- Accounting