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$

I only have these numbers attached.

TechnoTCL, Inc.

$($$ $000\text{'}$s$)$

$12/31/202112/31/202212/31/2023$

Current Assets

Cash And Cash Equivalents $9,15710,6078,719$

Short Term Investments $6,9668,897270$

Net Receivables $6,6937,0217,140$

Inventory $2,7222,9443,126$

Other Current Assets $31432,042$

Total Current Assets $25,56929,51221,297$

Long Term Investments $1,9492,0392,407$

Property Plant and Equipment $16,59017,23717,587$

Goodwill $14,42914,74114,806$

Intangible Assets $13,43213,83515,823$

Other Assets $6359105,122$

Total Assets $72,60478,27477,042$

Current Liabilities

Accounts Payable $6,1576,7247,211$

Short$/$Current Long Term Debt $4,4004,0173,951$

Other Current Liabilities $3,8704,1126,601$

Total Current Liabilities $14,42714,85317,763$

Long Term Debt $30,05233,79328,293$

Other Liabilities $11,10214,52212,611$

Total Liabilities $55,58163,16858,667$

Stockholders' Equity

Total Stockholder Equity $17,02315,10618,375$

$12/31/202112/31/202212/31/2023$

Revenue

Total Revenue $56,51957,90251,728$

Cost of Revenue $25,40025,34023,502$

Gross Profit $31,11932,56228,226$

Operating Expenses

Selling General and Administrative $21,22620,70619,184$

Operating Income or Loss $9,89311,8569,042$

Income from Continuing Operations

Other Income$/$Expenses Net $--1,508-1,507-1,148$

Interest Expense $1,2071,2881,220$

Income Before Tax $7,1789,0616,674$

Income Tax Expense $1,9574,1302,696$

Net Income $5,2214,9313,978$