XYZ Company has 40% debt and 60% equity, as the optimal capital structure. Their stock price is $60, the last dividend distributed was $6.5, the growth rate is expected as 6%, the corporate tax rate is 20% and flotation costs are 10%. They can borrow at a 10% rate up to $15 million, above which the interest rate rises to 12%. Their expected net income for next year is $25 million, and 45% will be distributed as dividends. They have two projects under analysis: 1 and 2. Project 1 has higher profitability and will be executed first. Their respective investments are $17 million and $30 million.

a. Please calculate component costs, and breakpoint(s).

b. Please calculate WACC’s.

c. What will be the cost of capital specific to each project?

Answer rating: 100% (QA)

Answer But we can also allocate all the retained earnings to project 1 and remaining 325 will be ... View the full answer