It is expected that you prepare a report based on information provided below.You should approach this from the perspective of upper-level managers. Included in the report should be:
1)An evaluation of projects based on information provided below
2)A discussion of other things that may need to be considered (theoreticallyas no information about the characteristicsof the projects is provided beyond independence/mutual exclusivity).
3)A suggestion of which projects should be accepted, in order of preference,and which should be rejected
.4)An evaluation of the Marginal Cost of Capital (weighted average cost of capital on a marginal basis
)5)A suggestion of what level of funds should be supplied through retained earnings, new debt, new issue of preferred stock and new issue of common stock.
6)A discussion of how dividend policy may affect the decision of capital investPage 3UU-MBA-752-ZM: Corporate FinanceUU-MBA-752-ZM:Corporate FinanceInformation required to evaluate project options, and cost of capital and funding options.Threeprojects being considered. Projects A1 and A2 are mutually exclusive (based on equipment that would be supplied from two different sources) and Project B which is independent of the A projects.Followingare the projectedcashflowsof the projects:YearProject A1Project A2Project B0$(20,000,000)$(22,500,000)$(52,000,000)110,000,00010,000,00020,000,00029,000,00012,000,00020,000,000312,000,0007,000,00020,000,0004–5,000,00020,000,000Using the MCC which you will calculate based on the information below, determine which project/s should be accepted. Discuss the techniques used and how your decision of which project/s to acceptis influenced by thetechniques used.The company has an optimal capital structure of 50%debt, 10% preferred stock and 40% common equity. The corporation’s current tax rate is 30%.
a)The company currently borrows funds atan average rate of 10%. Find the after tax cost of debt
.b)The price of preferred stock today is $125. Floatation fees are $5.50. The annual dividend on outstanding preferred stock is $12.00. Find the cost of issuing new preferred stock
c)The price of common stock today is $25.60,the most recent dividend was $1.95 anddividend is expected to remain constant at 5%. The flotation cost of issuing new common stock is 10% ofthe price. Find the cost of retained earningsandthe cost of issuing new common stock
d)If the companyexpects to retain $420,000 in earnings over the next year, find the breaks in the MCC curve
e)Using the component funding rates found aboveand the breaks in the MCC curvefound above, calculate the different levels of marginal cost of capital.