Chapter 9, Problem 9.1P

a)

Summary Introduction

To discuss: The recommendation regarding an investment opportunity.

Introduction:

Every firm requires capital to fund their long-term investments. The typical sources of capital for a firm include equity and debt. Firms raise their capital by selling securities to investors and also by reinvesting profits back to the firm.

b)

Summary Introduction

To discuss: The recommendation regarding an investment opportunity.

Introduction:

Every firm requires capital to fund their long-term investments. The typical sources of capital for a firm include equity and debt. Firms raise their capital by selling securities to investors and also by reinvesting profits back to the firm.

c)

Summary Introduction

To discuss: The reasons for the recommendations regarding an investment opportunity.

Introduction:

Every firm requires capital to fund their long-term investments. The typical sources of capital for a firm include equity and debt. Firms raise their capital by selling securities to investors and also by reinvesting profits back to the firm.

d)

Summary Introduction

To calculate: The weighted average cost of capital (WACC).

Introduction:

The expected average cost from different sources of capital of the company is known as weighted average cost of capital. WACC is calculated as a weighted proportion of the cost of various components in the capital structure.

${\text{r}}_{\text{WACC}}=\left({\text{w}}_{\text{d}}\times {\text{r}}_{\text{d}}\right)+\left({\text{w}}_{\text{s}}\times {\text{r}}_{\text{s}}\right)$

e)

Summary Introduction

To discuss: The recommendation regarding investment opportunity based on WACC.

Introduction:

The expected average cost from different sources of capital of the company is known as weighted average cost of capital. WACC is calculated as a weighted proportion of the cost of various components in the capital structure.

${\text{r}}_{\text{WACC}}=\left({\text{w}}_{\text{d}}\times {\text{r}}_{\text{d}}\right)+\left({\text{w}}_{\text{s}}\times {\text{r}}_{\text{s}}\right)$

f)

Summary Introduction

To compare: The decisions based on both the methods.

Introduction:

The expected average cost from different sources of capital of the company is known as weighted average cost of capital. WACC is calculated as a weighted proportion of the cost of various components in the capital structure.

${\text{r}}_{\text{WACC}}=\left({\text{w}}_{\text{d}}\times {\text{r}}_{\text{d}}\right)+\left({\text{w}}_{\text{s}}\times {\text{r}}_{\text{s}}\right)$