TSL, a supplier of high-end fitness equipment, has some investment opportunities. Due to capital rationing TSL can spend only up to $2,000,000 in new investment opportunities. TSL has the following information to consider. Opportunity to Invest IRR Cost Project A 16% $300,000 Project B 14% $500,000 Project C 12% $500,000 Project D 11% $600,000 Project E 15% $700,000 Project F 18% $500,000 The preferred Capital structure for TSL is: DEBT 50%, Preferred 10% and Equity 40% The Financial manager has also determined that TSL has $120,000 available in retained earnings and they can borrow $250,000 debt without incurring additional financing costs. The cost of debt, preferred shares and equity are currently 6%, 10% and 18% net to taxes respectively as applicable, The range of new financing cost beyond break points are First Break point: Debt 8% Preferred 10% (no change) and Equity 18% Second Break point: Debt 10%, Preferred 10% ( no change) and Equity 20% Required: A) Compute the Weighted Average Cost of Capital ( WACC and complete the Marginal Cost of Capital (MCC) for the Various range of financing.
TSL, a supplier of high-end fitness equipment, has some investment opportunities. Due to capital rationing TSL can spend only up to $2,000,000 in new investment opportunities. TSL has the following information to consider. Opportunity to Invest IRR Cost Project A 16% $300,000 Project B 14% $500,000 Project C 12% $500,000 Project D 11% $600,000 Project E 15% $700,000 Project F 18% $500,000 The preferred Capital structure for TSL is: DEBT 50%, Preferred 10% and Equity 40% The Financial manager has also determined that TSL has $120,000 available in retained earnings and they can borrow $250,000 debt without incurring additional financing costs. The cost of debt, preferred shares and equity are currently 6%, 10% and 18% net to taxes respectively as applicable, The range of new financing cost beyond break points are First Break point: Debt 8% Preferred 10% (no change) and Equity 18% Second Break point: Debt 10%, Preferred 10% ( no change) and Equity 20% Required: A) Compute the Weighted Average Cost of Capital ( WACC and complete the Marginal Cost of Capital (MCC) for the Various range of financing.
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
Problem 1PS
Related questions
Question
B) Draw the firms marginal cost of capital (MCC) and the Investment Opportunity Schedule (IOS)
C) Which of the projects should they select? why?
D) Calculate the overall cost of capital for TSL
Transcribed Image Text:TSL , a supplier of high-end fitness equipment, has some investment opportunities. Due to capital rationing
TSL can spend only up to S2,000,000 in new investment opportunities. TSL has the following information
to consider.
Opportunity to Invest IRR
Cost
Project A
16% S300,000
Project B
14% $500,000
Project C
12% $500,000
Project D
11% $600,000
Project E
15% S700,000
Project F
18% $500,000
The preferred Capital structure for TSL is: DEBT 50%, Preferred 10% and Equity 40%
The Financial manager has also determined that TSL has S120,000 available in retained earnings and they
can borrow $250,000 debt without incurring additional financing costs.
The cost of debt, preferred shares and equity are currently 6%, 10% and 18% net to taxes respectively as
applicable, The range of new financing cost beyond break points are
First Break point: Debt 8% Preferred 10% (no change) and Equity 18%
Second Break point: Debt 10%, Preferred 10% ( no change) and Equity 20%
Required:
A) Compute the Weighted Average Cost of Capital (WACC and complete the Marginal Cost of Capital
(MCC) for the Various range of financing.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education