Rainbow Company is using both debt and equity financing. Its target capital structure is to achieve 30 percent debt and 70% equity. Early this year, the company invested in project A that provided an IRR of 7 percent. This project was financed by debt costing 5 percent. Later on, the company also found similar project B that had an IRR return of 12 percent. The Chief Financial Officer, however, commented that project B was not acceptable because it would require the issuance of common stock at a higher cost of 14 percent. 

Discuss whether the CFO is using “cost of capital” approach in evaluating the company’s investment. Do you agree with the CFO’s project evaluation decision? Explain. [within 200 words]

Answer rating: 100% (QA)

ANSWER IS The CFOs decision to reject project B due to the higher cost of equity 14 compared to the ... View the full answer