Question

The management of California Potato Industries (CPI) is planning next year’s capital budget. The company’s earnings...

The management of California Potato Industries (CPI) is planning next year’s capital budget. The company’s earnings and dividends are growing at a constant rate of 4%. The last dividends (DIV0) was $0.85; and the current equilibrium stock price is $6.85. CPI can raise new debt at a 12% before-tax cost. CPI is at its optimal capital structure which is 35% debt and 65% equity, and the firm’s marginal tax rate is 38%. FCI has the following independent, indivisible, and equally risky investment opportunities.

Project

Cost

Rate of Return

A

-$12,000

18%

B

-$11,000

17%

C

-$15,000

16%

D

-$25,000

12%

1) What is CPI's WACC?

2) What is CPI's optimal capital budget?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A firm is reviewing its next year’s budget with the following projects. Project A B C...
A firm is reviewing its next year’s budget with the following projects. Project A B C D IRR 9.0% 9.5% 10.5% 10.0% Capital Required $0.5 million $0.7 million $1.5 million $0.8 million A capital structure of 60% debt and 40% equity needs to be kept.  Besides $0.6 million retained earnings, firm can also borrow up to $1.2 million at an after-tax cost of 5%.  For any new debt, the rate is 7% after tax.  The cost of existing equity is 9% and the...
Example 1: Use the following information to answer the next FIVE questions. The Global Advertising Company...
Example 1: Use the following information to answer the next FIVE questions. The Global Advertising Company has a marginal tax rate of 40%. The company can raise debt at a 12% interest rate. The last dividend paid by Global was $1.10. Global’s common stock is selling for $8.30 per share, and its expected growth rate in earnings and dividends is 4%. Global plans to finance all capital expenditures with 30% debt and 70% equity. 1)What is the after-tax cost of...
Rolodex Inc. is in the process of determining its capital budget for the next fiscal year....
Rolodex Inc. is in the process of determining its capital budget for the next fiscal year. The firm’s current capital structure, which it considers to be optimal, is contained in the following balance sheet: Note: For this problem, use the book value of the items to get the capital structure. However, you normally want to use the market values. Long-term debt is the only debt capital structure account. Add common stock, capital in excess of par, and RE to get...
Please show work/formulas and financial calculator steps, if used. Answer as much as you can (The...
Please show work/formulas and financial calculator steps, if used. Answer as much as you can (The following information applies to Problems 1-4) The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets Current assets                                        $ 38,000,000 Net plant, property, and equipment                    101,000,000 Total assets                                          $139,000,000 Liabilities and Equity Accounts payable                                      $ 10,000,000 Accruals                                                9,000,000 Current liabilities                                   $...
Whitson Hog Heaven Inc. has the following capital budgeting opportunities this year. The following are the...
Whitson Hog Heaven Inc. has the following capital budgeting opportunities this year. The following are the IRR and corresponding investments required by the projects listed below: Project                                     IRR                      Investment                 A                                                     10%                             $1,000     B                                                     13%                             $3.000     C                                                     14%                             $2,000     D                                                     9%                              $5,000     E                                                      15%                             $9,000 Whitson’s balance sheet is:      Assets     $600,000            Liabilities:   $500,000                                                                                                       Equity        $100,000 Whitson has available to him 3 sources of debt. Short term...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how the firms resources incompetencies support the given pressures regarding costs and local responsiveness. Describe entry modes have they usually used, and whether they are appropriate for the given strategy. Any key issues in their global strategy? casestudy: Atlanta, June 17, 2014. Sea of Delta employees and their families swarmed between food trucks, amusement park booths, and entertainment venues that were scattered throughout what would...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT