Rainbow Company is using both debt and equity financing. Its target capital structure is to achieve 30
Fantastic news! We've Found the answer you've been seeking!
Question:
Rainbow Company is using both debt and equity financing. Its target capital structure is to achieve 30 percent debt and 70% equity. Early this year, the company invested in project A that provided an IRR of 7 percent. This project was financed by debt costing 5 percent. Later on, the company also found similar project B that had an IRR return of 12 percent. The Chief Financial Officer, however, commented that project B was not acceptable because it would require the issuance of common stock at a higher cost of 14 percent.
Discuss whether the CFO is using “cost of capital” approach in evaluating the company’s investment. Do you agree with the CFO’s project evaluation decision? Explain. [within 200 words]
Related Book For
Auditing and Assurance Services Understanding the Integrated Audit
ISBN: 978-0471726340
1st edition
Authors: Karen L. Hooks
Posted Date: