(P) is evaluating four independent investments. The cost of each project is $214,000. The internal rates of return (IRRS) for the projects are IRR, = 19%, IRR, = 15%, IRR, = 18%, and %3D IRR, = 14%. P3's investment banker has provided 4. the following WACC table: Total Amount Raised WACC $1-$520,000 11.0% 520,001- 745,000 12.5 Over 745,000 15.2 Which project(s) should P³ purchase? 11-20 Tri-Q Supply Company is considering an h expansion project to increase sales. The project, which costs $2.6 million, has an IRR equal to 9.5 percent. Any portion of the project can be purchased. Tri-Q expects to retain $1.3 million b of earnings this year. It can raise up to $420,000 in new debt with a before-tax cost equal to 5 percent; any additional debt will cost 7 percent before taxes. Tri-Q's cost of retained earnings is 12 percent, and its cost of new common equity is 14 percent. Its target capital structure consists of 35 percent debt and 65 percent common equity. If Tri-Q's marginal tax rate is 40 percent, what is the optimal capital budget? CHAPTER 11: The Cost of Capital 225
(P) is evaluating four independent investments. The cost of each project is $214,000. The internal rates of return (IRRS) for the projects are IRR, = 19%, IRR, = 15%, IRR, = 18%, and %3D IRR, = 14%. P3's investment banker has provided 4. the following WACC table: Total Amount Raised WACC $1-$520,000 11.0% 520,001- 745,000 12.5 Over 745,000 15.2 Which project(s) should P³ purchase? 11-20 Tri-Q Supply Company is considering an h expansion project to increase sales. The project, which costs $2.6 million, has an IRR equal to 9.5 percent. Any portion of the project can be purchased. Tri-Q expects to retain $1.3 million b of earnings this year. It can raise up to $420,000 in new debt with a before-tax cost equal to 5 percent; any additional debt will cost 7 percent before taxes. Tri-Q's cost of retained earnings is 12 percent, and its cost of new common equity is 14 percent. Its target capital structure consists of 35 percent debt and 65 percent common equity. If Tri-Q's marginal tax rate is 40 percent, what is the optimal capital budget? CHAPTER 11: The Cost of Capital 225
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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Transcribed Image Text:(P) is evaluating four independent
investments. The cost of each project is $214,000.
The internal rates of return (IRRS) for the projects
are IRR, = 19%, IRR, = 15%, IRR, = 18%, and
%3D
IRR, = 14%. P3's investment banker has provided
4.
the following WACC table:
Total Amount Raised
WACC
$1-$520,000
11.0%
520,001- 745,000
12.5
Over 745,000
15.2
Which project(s) should P³ purchase?
11-20 Tri-Q Supply Company is considering an
h expansion project to increase sales. The project,
which costs $2.6 million, has an IRR equal to
9.5 percent. Any portion of the project can be
purchased. Tri-Q expects to retain $1.3 million
b of earnings this year. It can raise up to $420,000
in new debt with a before-tax cost equal to
5 percent; any additional debt will cost 7 percent
before taxes. Tri-Q's cost of retained earnings is
12 percent, and its cost of new common equity is
14 percent. Its target capital structure consists of
35 percent debt and 65 percent common equity.
If Tri-Q's marginal tax rate is 40 percent, what is
the optimal capital budget?
CHAPTER 11: The Cost of Capital 225
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