Question: Ossoom Bhd Has To Decide Which Of The Following Four Projects Should Be Selected Projects Initial Investment (RM) IRR (%) Erengel 500000 14 Miramar 400000 8 Sanhook 600000 12 Vikende 300000 10 Below Is The Capital Structure For The Firm Sources Weight (%) Common Stock 60 Preferred Stock 20 Debt 20 The Current Cost Of Debt (before Taxes) Is 10 Percent …
Ossoom Bhd has to decide which of the following four projectsshould be selected
|
Projects |
Initial Investment (RM) |
IRR (%) |
|
Erengel |
500000 |
14 |
|
Miramar |
400000 |
8 |
|
Sanhook |
600000 |
12 |
|
Vikende |
300000 |
10 |
Below is the capital structure for the firm
|
Sources |
Weight (%) |
|
Common Stock |
60 |
|
Preferred Stock |
20 |
|
Debt |
20 |
The current cost of debt (before taxes) is 10 percent for thefirst RM200,000. The cost of any additional debt (before taxes) is13 percent.
The after tax cost of preferred share is 8 percent for the firstRM300,000. Exceeding that amount, the cost will increase to 10percent.
The current market price of its common equity is RM40. Thecompany’s current dividend is RM2 per share. The expected growthrate in earnings and dividends is 8 percent. If new common stockissued, it will incur floatation cost of 15 percent of the sellingprice. The company has RM300,000 retained earnings.
The marginal tax rate is 25 percent.
- Determine the weighted average cost of capital (WACC) for allthe identified range of financing.
- Construct the weighted marginal cost of capital (WMCC) curveand identify which project should the company choose? Why?
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