Concept of cost of capital Mace Manufacturing is in the process of analyzing its investment decision-making...

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Concept of cost of capital Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involve building new facilities in different regions, North and South. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table: a. An analyst evaluating the North facility expects that the project will be financed by debt that costs the firm 4.5%. What recommendation do you think this analyst will make regarding the investment opportunity? b. Another analyst assigned to study the South facility believes that funding for that project will come from the firm's retained earnings at a cost of 17.3%. What recommendation do you expect this analyst to make regarding the investment? c. Explain why the decisions in parts a and b may not be in the best interest of the firm's investors. d. If the firm maintains a capital structure containing 40% debt and 60% equity, find its weighted average cost using the data in the table. e. If both analysts had used the weighted average cost calculated in part d, what recommendations would they have made regarding the North and South facilities? f. Compare and contrast the analysts' initial recommendations with your findings in part e. Which decision method seems more appropriate? Explain why. Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Basic variables Cost North $7,000,000 South $6,370,000 Life 15 years Expected return 7.5% 15 years 15.2% Least-cost financing Source Debt Equity Cost (after-tax) 4.5% 17.3% Decision Action Investi Reason 7.5% >4.5% cost Don't invest 15.2% 17.3% cost - X the firm 4.5%. What recommendation do you think this analyst will make ected return of 4.5% is greater than the expected financing cost of 7.5% expected return of 7.5% is greater than the expected financing cost of ected return of 7.5% is greater than the expected financing cost of 4.5% Clear all Final check Concept of cost of capital Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involve building new facilities in different regions, North and South. The basic variables surrounding each project analysis and the resulting decision actions are summarized in the following table: a. An analyst evaluating the North facility expects that the project will be financed by debt that costs the firm 4.5%. What recommendation do you think this analyst will make regarding the investment opportunity? b. Another analyst assigned to study the South facility believes that funding for that project will come from the firm's retained earnings at a cost of 17.3%. What recommendation do you expect this analyst to make regarding the investment? c. Explain why the decisions in parts a and b may not be in the best interest of the firm's investors. d. If the firm maintains a capital structure containing 40% debt and 60% equity, find its weighted average cost using the data in the table. e. If both analysts had used the weighted average cost calculated in part d, what recommendations would they have made regarding the North and South facilities? f. Compare and contrast the analysts' initial recommendations with your findings in part e. Which decision method seems more appropriate? Explain why. Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Basic variables Cost North $7,000,000 South $6,370,000 Life 15 years Expected return 7.5% 15 years 15.2% Least-cost financing Source Debt Equity Cost (after-tax) 4.5% 17.3% Decision Action Investi Reason 7.5% >4.5% cost Don't invest 15.2% 17.3% cost - X the firm 4.5%. What recommendation do you think this analyst will make ected return of 4.5% is greater than the expected financing cost of 7.5% expected return of 7.5% is greater than the expected financing cost of ected return of 7.5% is greater than the expected financing cost of 4.5% Clear all Final check