XYZ Company has 40% debt 60% equity as optimal capital structure.
The nominal interest rate for the company is 12% up to $5 million debt, above which interest rate rises to 14%. Expected net income for the year is $17,5 million, dividend payout ratio is 45%, last dividend distributed was $4,5/share, P0 = $37, g=5%, flotation costs 10% and corporate tax rate is 40%.
a. Find the break points
b. Calculate component costs (cost of each financing source)
c. Calculate WACCs.
d. Two projects are available: 1 st. Project requires 15 million initial investments, IRR=18% 2 nd. Project requires 10 million initial investments, IRR=12% Please find the optimal capital budget. (Project(s) to be invested in)