Part Two: Require Return for Capital Funding

Suppose that TechnoTCL is considering a new project. They are trying to determine the required rate of return for their debt and equity holders. See the information below:

A $6\mathrm{.}5\%$ percent annual coupon bond with $15$ years to maturity, selling for $96\%$ of par. The bonds make annual payments. What is the before tax cost of debt? If the tax rate is $30\%,$ what is the after$-$tax cost of debt?

The firm's beta is $1\mathrm{.}5.$ The risk$-$free rate is $4\mathrm{.}0\%$ and the expected market return is $10\%.$ What is the cost of equity using CAPM?

Use the balance sheet for TechnoTCL to determine the weighting for capital used by the company. What are the weightings for long$-$term debt and common equity?

Calculate the WACC for TechnoTCL.

If the company has three possible projects with the following characteristics and has $$300,000$ available to fund capital investments, what decision should be made for each project $($A$-$C$)?$ Why?

Possible Company Projects

Project Expected Return Capital Required

A $8\mathrm{.}8\%$ $$30,000$

B $12\mathrm{.}5\%$ $$150,000$

C $9\mathrm{.}6\%$ $$160,000$