The Just before approving its second capital budget of LE 3.6 m., Lumby and Jones Eggs...
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The Just before approving its second capital budget of LE 3.6 m., "Lumby and Jones Eggs Co.", realized a total average cost of capital rate of 19% in relation to its existing investments of LE 4.4 m. If the LE 3.6m. new finance needed for the second capital budget is added to these LE 4.4m. existing investments, the finance lines available now at their best are restricted by the following four lines of finance: Lines of Finance Owned Capital Long-term loans Rates of Dividends Rates of Interest First line Second line Third line Fourth line LE 6 million LE 5 million LE 4 million LE 3 million LE 2 million LE 3 million LE 4 million LE 5 million 20.3 % 20.5% 21.0 % 21.5% 17.1% 17.7% 17.9 % 18.3% The new full finance of LE 3.6 m. can be invested now in only one of two alternative courses of investments including ready for operating mutually exclusive investment projects. The net cash flows and the IRR of each of these two alternative courses of investments are as follows where the first alternative is tax-exempted: Year 1 Year 2 First Alternative LE 864000 LE 864000 Second Alternative LE 828000 LE 828000 Year 3 LE 1864000 LE 828000 IRR Year 4 LE 3224000 24% LE 4428000 23% Required: (A) For the assumed LE 8m. total capital to be invested, compute the total weighted average cost of capital at the optimal capital structure line. (B) Compute the overall marginal cost of capital related to the best marginal alternative course of investment then determine the optimal investment decision. The Just before approving its second capital budget of LE 3.6 m., "Lumby and Jones Eggs Co.", realized a total average cost of capital rate of 19% in relation to its existing investments of LE 4.4 m. If the LE 3.6m. new finance needed for the second capital budget is added to these LE 4.4m. existing investments, the finance lines available now at their best are restricted by the following four lines of finance: Lines of Finance Owned Capital Long-term loans Rates of Dividends Rates of Interest First line Second line Third line Fourth line LE 6 million LE 5 million LE 4 million LE 3 million LE 2 million LE 3 million LE 4 million LE 5 million 20.3 % 20.5% 21.0 % 21.5% 17.1% 17.7% 17.9 % 18.3% The new full finance of LE 3.6 m. can be invested now in only one of two alternative courses of investments including ready for operating mutually exclusive investment projects. The net cash flows and the IRR of each of these two alternative courses of investments are as follows where the first alternative is tax-exempted: Year 1 Year 2 First Alternative LE 864000 LE 864000 Second Alternative LE 828000 LE 828000 Year 3 LE 1864000 LE 828000 IRR Year 4 LE 3224000 24% LE 4428000 23% Required: (A) For the assumed LE 8m. total capital to be invested, compute the total weighted average cost of capital at the optimal capital structure line. (B) Compute the overall marginal cost of capital related to the best marginal alternative course of investment then determine the optimal investment decision.
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A Total Weighted Average Cost of Capital 171 x 2000000 203 x 5000000 205 x 4000000 210 x 3000000 215 x 5000000 8000000 Total Weighted Average Cost of ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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