The Optimal Capital Budget (ppt)

The Optimal Capital Budget (ppt) - 8E - 1 Chapter 8...

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8E - 1 Copyright © 1999 by The Dryden Press Chapter 8 Extension: The Optimal Capital Budget n We’ve seen how to evaluate projects. n We need cost of capital for evaluation. n But corporate cost of capital depends on size of capital budget. n Must combine WACC and capital budget analysis.
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8E - 2 Copyright © 1999 by The Dryden Press Blum Industries has 5 potential projects: Projects B & B* are mutually exclusive, the others are independent. Neither B nor B* will be repeated . Project Cost CF Life (N) IRR A $400,000 $119,326 5 15% B 200,000 56,863 5 13 B* 200,000 35,397 10 12 C 100,000 27,057 5 11 D 300,000 79,139 5 10
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8E - 3 Copyright © 1999 by The Dryden Press Additional Information For differential project risk, add or sub- tract 2% to WACC. Interest rate on new debt 8.0% Tax rate 40.0% Debt ratio 60.0% Current stock price, P0 $20.00 Last dividend, D0 $2.00 Expected growth rate, g 6.0% Flotation cost on CS, F 19.0% Expected addition to RE $200,000 (NI = $500,000, Payout = 60%.)
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The Optimal Capital Budget (ppt) - 8E - 1 Chapter 8...

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