IRR: IRR is also called as internal rate of return . That is the rate at which present value of cash inflows will be equal to present value of cash outflows. At IRR, NPV will be equal 0. Decision for IRR rule: IRR>Cost of capital, Accept the project IRR<Cost of capital, Reject the project MIRR: MIRR is also called as modified internal rate of return. Under MIRR cash flows are reinvested at cost of capital. IRR assumes cash flows are reinvested at IRR, which is unrealistic, this was mitigated by the MIRR. Calculate the MIRR as follows: MIRR = Future value of cash flows Present value of cash flows n − 1 Decision for MIRR rule: MIRR>Cost of capital, Accept the project MIRR<Cost of capital, Reject the project Cost of the project is $5,500 and cash inflows are $1,800 for four years. Cost of capital is 8%.

Question

Moose Enterprises finds it is necessary to determine its marginal cost of capital. Moose’s current capital structure calls for 50 percent debt, 30 percent preferred stock, and 20 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt, 9.6 percent; preferred stock, 9 percent; retained earnings, 10 percent; and new common stock, 11.2 percent. a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, Ke.) b. If the firm has $18 million in retained earnings, at what size capital structure will the firm run out of retained earnings? c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 20 percent of the capital structure, but will all be in the form of new common stock, Kn.) d. The 9.6 percent cost of debt referred to earlier…

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Question

Chapter 9, Problem 11PROB

Summary Introduction

IRR:

IRR is also called as internal rate of return. That is the rate at which present value of cash inflows will be equal to present value of cash outflows. At IRR, NPV will be equal 0.

Decision for IRR rule:

IRR>Cost of capital, Accept the projectIRR<Cost of capital, Reject the project

MIRR:

MIRR is also called as modified internal rate of return. Under MIRR cash flows are reinvested at cost of capital. IRR assumes cash flows are reinvested at IRR, which is unrealistic, this was mitigated by the MIRR.

Calculate the MIRR as follows:

MIRR=Future value of cash flowsPresent value of cash flowsn−1

Decision for MIRR rule:

MIRR>Cost of capital, Accept the projectMIRR<Cost of capital, Reject the project

Cost of the project is $5,500 and cash inflows are $1,800 for four years. Cost of capital is 8%.

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