Instead, we will use the dividend discount model to determine the cost of equity, as follows:
D/P (1-F)+g
508/25(1-.15)+.12 = 13.7%
These costs will be constant no matter how much capital is raised. The variable component of the cost of capital is reflected in the flotation costs, which will be a fee at the time of issue. The capital structure is also affected by the amount raised, but there is no indication that a change in the capital structure at this point will result in a change in these component costs. That said, it can be expected that if the capital structure becomes too debt-laden, the company's bond rating could be lowered, and that will increase the cost of debt.
5) the MCC for the intended investments is as follows:
IRR
Weight
Therefore, the five projects in total would have a weighted cost of capital of 17.6%.
6) the Investment Opportunity Schedule shows the following order:
IRR
Cost
Cumulative Cost
If all projects are undertaken, $2.5 million will need to be raised. At this point, all five projects are viable, given that each is above the cost of capital for the firm. The IRR can be increased, however, by dropping the weakest projects. For example, if Project B. is dropped, this will increase the IRR of the remaining four projects to 20%.
The new hurdle rate is the WACC, which is 6.06875%. This gives us new project NPVs as follows:
new NPV
These projects are still acceptable. They still each have positive net present values, which in fact have improved because the cost of...
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