The Sunland Company has an after-tax cost of debt capital of 4 percent, a cost of preferred stock of 7 percent, a cost of equity capital of 10 percent, and a weighted average cost of capital of 6 percent. Sunland intends to maintain its current capital structure as it raises additional capital. In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is: O 6 percent. 10 percent. 7 percent. O 4 percent.
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- 7. Fiftycent Inc., has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, S and T. The cash flows for each project are presented in the following table. Calculate the NPV and the annualized net present value (ANPV) in order to copy for each project using the firm's cost of capital of 9.0%. Which project would you recommend? (Click on the icon here the contents of the data table below into a spreadsheet.) Initial Investment Year 1 2 456 A WN 3 4 7 Project S $42,000 The NPV for project S is $ The NPV for project T is $ The ANPV for project S is $ The ANPV for project T is $ Which project would you recommend? The firm should choose project (1) - (1) OS OT $17,750 24,600 36,800 - Cash Inflows Project T $67,500 $26,400 22,600 37,000 19,700 10,900 15,350 9,780 (Round to the nearest cent.) (Round to the nearest cent.) 203 005 (Round to the nearest cent.) (Round to the nearest cent.) (Select from the drop-down menu.) bau bao otis…(question3 c,d) c) Calculate the profitability index (PI) for each project d) Calculate the internal rate of return (IRR) for each project.A firm with a cost of capital of 7 percent is evaluating three independent capital projects. The internal rates of return are as follows: Internal Rate of Return T1% Proj ect 2. 3. The firm should accept Project 2, and reject Projects 1 and 3 O accept Project 1, and reject Projects 2 and 3 O accept Project 1 and 2, and reject Project 3 O accept Project 3, and reject Projects 1 and 2
- Mogul Company uses a 12% discount rate in making capital budgeting decisions. Mogul is considering a project that has a net present value of $75,000. What is the project's internal rate of return? O Less than 12% O Equal to 12% O Less than or equal to 12% O Greater than 12% O None of the aboveBrown and CompanyMResorts has a current capital structure that is 70% equity, 20% debt, and 10% preferred This is considered optimal. MResorts is considering a $35 million capital budgeting project. MResorts has estimated the following: After-tax cost of debt: 9% Cost of preferred stock: 10% Cost of equity: 13.0% What should cost of capital be for this project? A. 8.7% B. 9.6% C. 11.9% D. 10.13%
- E Over-the-Top Canopies (OTC) is evaluating two independent investments. Project S costs $170,000 and has an IRR equal to 9 percent, and Project L costs $160,000 and has an IRR equal to 7 percent. OTC's capital structure consists of 20 percent debt and 80 percent common equity, and its component costs of capital are rat = 4%, rs = 11%, and re = 14.5%. If OTC expects to generate $260,000 in retained earnings this year, which project(s) should be purchased? Round your answers to one decimal place. Project S L eBook Thus, -Select- WACC % % Acceptable? -Select- ✓ -Select- should be purchased. Grade it Now Save & Continue Continue without savingHarris Company must set its investment and dividend policies for the coming year. It has three independent projects from which to choose, each of which requires a $3 million investment. These proj- ects have different levels of risk, and therefore different costs of capital. Their projected IRRs and costs of capital are as follows: Project A: Cost of capital ? 17%; IRR ? 20% Project B: Cost of capital ? 13%; IRR ? 10% Project C: Cost of capital ? 7%; IRR ? 9% Harris intends to maintain its 35% debt and 65% common equity capital struc- ture, and its net income is expected to be $4,750,000. If Harris maintains its residual dividend policy (with all distributions in the form of dividends), what will its payout ratio be?XYZ Corp. raised P50 million from bonds and P110 million from ordinary shares. It invested P150 million of these into operating assets. Subsequently, XYZ was offered a project that is similar to its operations but requires a higher level of insurance coverage. This would require P10 million in invested capital. What is the most likely discount rate to be used for evaluating this project? *A. A project-specific rate which is the adjusted weighted average cost of capitalB. Weighted average cost of capitalC. Incremental cost of capitalD. A project-specific rate which is the adjusted incremental cost of capital
- am. 126.3. ABC is evaluating an investment in specialized equipment that cost $40 million and is projected to generate after-tax and pre-leverage cash flow of $8 million per year for seven years. The firm’s cost of capital is approximately 4.00%. Determine each of the following capital budgeting metrics and indicate whether and why the equipment should be purchased (or not) by each Reinvest cash flow for the MIRR model at the cost of capital. Payback NPV IRR MIRRFood and Health Company is expanding and has an average-risk project under consideration. The company decides to fund the project in the same manner as the company’s existing capital structure. The cost of debt is 9.00%, the cost of preferred stock is 12.00%, the cost of common stock is 16.00%, and the WACC adjusted for taxes is 11.50%. Incremental cash flows: Category T0 T1 T2 T3 Investment -$2,500,000 NWC -$250,000 $250,000 Operating Cash Flow $750,000 $750,000 $750,000 Salvage $50,000 If the internal rate of return (IRR) of the project is estimated to be 11%, according to the IRR decision making rule, should this project be accepted? Why or why not?