6. Weaver Choco late Co. expects to earn $3,500 during the current year and its
ID: 1130650 • Letter: 6
Question
6. Weaver Choco late Co. expects to earn $3,500 during the current year and its dividend payout ratio is target capital structure calls for 55% equity financing. Weaver Co. wants to stay away from 65%. The new common stock issue. a. Compute the retained earningr brakpoirt for the compary. Weaver Co. has a WACC of 8% and faces the choice of the following projects: Project A will cost $1,000 to implement and will produce a rate of return of 9% per year Project B will cost $500 and will produce a return of 4% per year; Project C will cost $750 and will produce a return of 8.1% per year, Project D will cost $900 and will produce a return of 8.5% per year. Based on your answer in part (a) which projects) should the company accept without issuing new common equit? do you think so?Explanation / Answer
Question 6). a). Solution :- Retained earnings breakpoint = Retained earnings / Weight of equity.
= [ 3500 * (1 - 0.65) ] / 0.55
= (3500 * 0.35) / 0.55
= 1225 / 0.55
= $ 2227.27 (approx).
Conclusion :- Retained earnings breakpoint = $ 2227.27 (approx).
Question 6). b). Answer :- Project B and Project C should be accepted without the need of issuing the new common equity.
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