Assume the following investment opportunities (Investments available) 1. $600,00

Question

Assume the following investment opportunities (Investments available)

1. $600,000 cost, returns $170,000 per year for 6 years

2. $800,000 cost, returns $200,000 year 1, $400,000 year 2, $500,000 year 3

3. $1,000,000 cost, returns $151,426 per year, 16 years

4.$1,500,000 cost, returns $250,000 years 1-5, $300,000 years 6-10

5. $750,000 cost, returns $10,000,000 at the end of 25 years

6. $2,500,000 cost, returns $500,000 per year for 7 years

7. Cost $200,000 per year for t0 - t7, returns $2,200,000 at the end of 8 years

8. Cost $1,750,000, returns $150,000 for 20 years

Graph the WACC schedule and the IOS schedule, and show the capital expenditure budget for the company. Give the dollar amount of investment spending.

Explain your answer in terms of maximizing shareholder wealth.

Explanation / Answer

source of capital Lower Limit Upper Limit After Tax cost Long term debt.4 X 4.7114% (present values) = Long term debt. Preferred Equity 0.10 1-17% = .833. Common equity $ 1.00 $ 200,000.00 20% $ 200,000.00 24%.

There will be two break points when the WACC would change one would be when the breaking limit of common equity is reached and second would be when limit of long term debt is breached.

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