Frank\'s Fried Chicken Company has 50 stores currently. The company targets a 40

Question

Frank's Fried Chicken Company has 50 stores currently. The company targets a 40% Debt to Total Assets ratio - therefore any capital project will be funded with 40% debt and 60% equity. The company's weighted average cost of capital is 10% at this target leverage level.

The company has the following expansion plans for the upcoming year: 1) 10 new store locations on the east coast, which will require an investment of $500,000 and has a projected IRR (internal rate of return on investment) of 11%; and 2) 15 stores on the west coast with a total cost of $800,000 and a forecasted IRR of 10.5%. The company's net income was $1,100,000 for the past 12 months and management follows the residual policy with regards to its dividends. Based on this information, the company will need to retain as retained earnings how much of its net income to fund the two capital projects (hint: what is total investment amount of two projects and how much will be funded by equity (some of the cash needed for the two projects will be debt funding as stated above)?

Explanation / Answer

hence the company has to retain 780000 of its netincome to fund the two capital projects, balance 520000 will be financed by issuing new debt to maintain the existing debt equity ratio.

Total required investment: East coast 10 stores 500000 West coast 15 stores 800000 1300000 Financing by: Equity 60% 780000 Debt 40% 520000 Total 1300000

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.