Question

The Cook Company has the following target capital structure:
Debt ........... 30%
Common equity ....... 70
Total capital ........ 100%
For the coming year, management expects to realize net earnings of $250,000. The past dividend policy of paying out 50 percent of earnings will continue. Present commitments from its banker will allow Cook to borrow $100,000 at 10 percent.
The company's tax rate is 40 percent; the current market price of its stock is $39.96 per share; its last dividend as $1.85 per share; and the expected growth rate is 8 percent.
The firm has the following investment opportunities for the next period:


Management asks you to help them determine what projects (if any) should be undertaken. You proceed with this analysis by answering the following questions:


a. What is the weighted average cost of capital?
b. What are the IRR values for Projects?
c. Which projects should Cook's managementaccept?


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  • CreatedSeptember 19, 2013
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