(10 pts) 5. (8 pts) 6. Vincent Corporation considers its optimal capital structure to be 60...

 

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(10 pts) 5. (8 pts) 6. Vincent Corporation considers its optimal capital structure to be 60 percent debt and 40 percent common stock. Vincent can borrow unlimited amounts at 12 percent. The common stock can be issued with a required return of 18%. Vincent has a tax rate of 25 percent. Vincent is considering four investment proposals: Level of Project ABCD Expected Return 30% 10% 15% 6% Risk High Ave Ave Low When Vincent evaluates a project, they consider the level of risk. If the risk level is high, Vincent adds a premium of three percent to the WACC. If the risk level is low, Vincent subtracts one percent. Required: a) Determine Vincent's weighted average cost of capital (WACC). b) Determine Vincent's optimal capital budget. Required: Suppose that you are considering the purchase of a 30-year Treasury bond, a 30-year Amazon.com, Inc. corporate bond, and the common stock of Amazon. The current risk premiums are provided: • Maturity risk premium • Default risk premium • Real risk-free rate Investment Required $200,000,000 $80,000,000 $300,000,000 $30,000,000 • • Inflation premium • Liquidity premium Seniority risk premium 3.00% 4.00% 1.50% 5.00% 6.00% 1.50% Determine the required rate of return for all three securities based on the information provided above. (10 pts) 5. (8 pts) 6. Vincent Corporation considers its optimal capital structure to be 60 percent debt and 40 percent common stock. Vincent can borrow unlimited amounts at 12 percent. The common stock can be issued with a required return of 18%. Vincent has a tax rate of 25 percent. Vincent is considering four investment proposals: Level of Project ABCD Expected Return 30% 10% 15% 6% Risk High Ave Ave Low When Vincent evaluates a project, they consider the level of risk. If the risk level is high, Vincent adds a premium of three percent to the WACC. If the risk level is low, Vincent subtracts one percent. Required: a) Determine Vincent's weighted average cost of capital (WACC). b) Determine Vincent's optimal capital budget. Required: Suppose that you are considering the purchase of a 30-year Treasury bond, a 30-year Amazon.com, Inc. corporate bond, and the common stock of Amazon. The current risk premiums are provided: • Maturity risk premium • Default risk premium • Real risk-free rate Investment Required $200,000,000 $80,000,000 $300,000,000 $30,000,000 • • Inflation premium • Liquidity premium Seniority risk premium 3.00% 4.00% 1.50% 5.00% 6.00% 1.50% Determine the required rate of return for all three securities based on the information provided above.

Answer rating: 100% (QA)

a To determine Vincents weighted average cost of capital WACC we need to calculate the cost of debt and the cost of equity Cost of Debt Vincent can bo... View the full answer