Deliverable Length: 1000-1250 words + references
What does a company's cost of capital represent and how is it calculated? How do market rates and the company's perceived market risk impact its cost of capital, and how does the company's debt to equity mix impact this cost of capital? Using the information provided, develop a spreadsheet to calculate weighted average cost (WAC) and marginal weighted average cost (MCC) of capital for Strident Marks?
You have developed the following table concerning the cost of capital sources for Strident Marks:
|
Source of capital
|
After tax cost
|
|
Long term debt
|
6%
|
|
Preferred stock
|
18%
|
|
Common stock equity
|
20%
|
Strident Marks capital structure weights used to calculate its WACC are:
|
Source of Capital
|
After Tax Cost
|
Amount Available
|
After tax cost, After Break Point
|
|
Long-term debt
|
6%
|
200,000
|
12%
|
|
Preferred stock
|
18%
|
100,000
|
25%
|
|
Common stock equity
|
20%
|
200,000
|
40%
|
The future investment opportunities and the corresponding Internal Rate of Return (IRR) follow. As a result of operating its business operations profitably, Strident Marks has $1,000,000 to invest. Considering Strident Marks’ weighted average cost of capital and MCC, rank the investment opportunities and indicate which ones would be accepted, which (if any) would be rejected and why.
|
Investment Opportunity
|
IRR
|
Initial Investment
|
|
A
|
20%
|
$300,000
|
|
B
|
16%
|
$350,000
|
|
C
|
23%
|
$300,000
|
|
D
|
15%
|
$450,000
|
|
E
|
24%
|
$250,000
|
|
F
|
14%
|
$400,000
|
|
G
|
22%
|
$200,000
|
|
H
|
18%
|
$150,000
|
|
I
|
17%
|
$100,000
|