North Sea Oil has compiled the following data relative to current costs of its basic sources of
Question:
Source of capital Cost
Long-Term Debt ...............................7%
Proffered Stock...............................19%
Common Stock and Retained Earnings....20%
Below are the company's target capital structure proportion used in calculating the weighted average cost of capital.
Source of Capital Target Capital Structure
Long Term Debt..............................0.25
Preferred Stock...............................0.25
Common Stock and Retained Earnings...0.50
North Sea has the opportunity to invest in the following projects:
Using the WACC to calculate the NPV and evaluate the IRR, which project should be implemented? (you may also wish to include payback to further support your answer).
Assuming the project(s) is implemented using equity financing, the capital structure changes to:
Source of Capital New capital structure after project implementation
Long term debt...................................0.20
Preferred stock....................................0.20
Common stock and retained earnings.........0.60
Calculate the New WACC and briefly discuss in your report if this new WACC and capital structure might signal the market and investors
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...
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Related Book For
Principles of managerial finance
ISBN: 978-0132479547
12th edition
Authors: Lawrence J Gitman, Chad J Zutter
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