A hotel exhausts its $100,000 of available retained earnings (cost=12%), and after that, it should use more
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A hotel exhausts its $100,000 of available retained earnings (cost=12%), and after that, it should use more expensive common stock equity (cost=14%). Also, the hotel can borrow $200,000 at an after-tax cost of 6.5% and after that, additional debt will have an after-tax cost of 8%.
Cost of Preferred stock=10%, capital structure: debt 40%, preferred 10%, common 50%
1) Calculate the breaking points of equity and debt
2) Calculate the WACCs (Weighted average cost of capital) based on different ranges of required capital required.
3) Sketch the WACC levels in relative to different ranges of required capital.
4) Given the investment opportunities, which projects would you reject, and which projects would be accepted?
| Investment | Return Rate (%) | Initial Investment | Cumulative Investment |
| A | 13 | 100,000 | 500,000 |
| B | 11.8 | 120,000 | 550,000 |
| C | 11 | 120,000 | 520,000 |
| D | 10.8 | 150,000 | 500,500 |
| E | 9.9 | 180,000 | 300,000 |
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