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With this information irfmind, Allison decides that next year's hurdle rate will be

With this information irfmind, Allison decides that next year's hurdle rate will be

Essentials Of Investments
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
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As the CFO of Regency Health Care, one of Allison's primary responsibilities is to set the hurdle rate to use in evaluating future projects. Her approach is to set the hurdle rate at 12% more than the company's cost of capital, rounded to the next whole number. For the next year, she projects that the company's capital will be 60% debt with an overall interest rate of 4.25%, net of taxes. She knows that the private equity company that owns most of Regency's stock expects a return of 22% on its investment. With this information irfmind, Allison decides that next year's hurdle rate will be
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Information Provided:

  • Debt weight = 60%
  • Equity weight = 40%
  • Debt cost of capital = 4.25%
  • Equity cost of capital = 22%

 

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