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Bergman chapter10

# Bergman chapter10 - b 5.6 8 a 6 b 12 c 12 13 a 13.55 b...

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Chris Bergman Principles of Finance SECTION 25049 OPC 004 November 17, 2008 [email protected] Chapter 10 1) a. The firm is basing its decision on the cost to finance a particular project rather than on the firm’s combined cost of capital, which may lead to incorrect accept/reject decisions. b. WACC= (.4 x .07) + (.6 x .16) = 12.4% c. Project 263 would be rejected and Project 264 would be accepted. d. Opposite decisions are drawn using the two decision criteria. The overall cost of capital provides better decisions because it takes into consideration the long- term inter-relationship of financing decisions and expected average future cost of funds. 3) a. 6.996% or 7%

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Unformatted text preview: b. 5.6% 8) a. 6% b. 12% c. 12% 13) a. 13.55% b. 12.99% c. Using historical weights, the firm has a higher cost of capital due to the weighting of the more expensive common stock component, 65%, versus the target weight of 55%. 16) a. Cost of retained earnings = 7/90 + .06= 13.8% Cost of New common stock= 7/78 + .06= 14.97% or 15% Cost of preferred stock = 7.6/90= 8.4% The after-tax cost of debt = 4.6% Break point= \$100,000/.5= \$200,000 b. Based on the firm’s capital structure and the capital costs calculated earlier Ka= (.3x.046) + (.2x.084) + (.5x.138)= 9.96% or 10% Based on new common stock Ka= (.3x.046) + (.2x.084) + (.5x.15)= 10.6% GRADE 14/14...
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