Weekly tasks or assignments
(Individual or Group Projects) will be due by Monday and late submissions will
be assigned a late penalty in accordance with the late penalty policy found in
the syllabus. NOTE: All submission posting times are based on midnight Central
Time.
Respond to the following
scenario with your thoughts, ideas, and comments. Be substantive and clear, and
use research to reinforce your ideas.
Mary Francis has just returned
to her office after attending preliminary discussions with investment bankers.
Her last meeting regarding the intended capital structure of Apix went well,
and she calls you into her office to discuss the next steps.
“We will need to determine the
required return for our intended project so that we have a decision criteria
defined for the project,” she says.
“Do you have the information I
need to describe capital structure and to calculate the weighted average cost
of capital (WACC)?” you ask.
“I do,” she smiles. “We can
determine the target WACC for Apix Printing Inc., given these assumptions,” she
says as she hands you a piece of paper that says the following:
·
Weights of 40% debt and 60%
common equity (no preferred equity)
·
A 35% tax rate
·
Cost of debt is 8%
·
Beta of the company is 1.5
·
Risk-free rate is 2%
·
Return on the market is 11%
“Great,” you say. “Thanks.”
“Be sure to indicate how these
costs of capital might be used to determine the feasibility of the capital
project,” Mary says. “I want your recommendation about which is more
appropriate to apply to project evaluation, too. Let me know what you think.”
“One more thing,” she says as
she stands up to signal the end of the meeting. “You did a good job with the
explanations that you provided Luke the other day. Would you have time to
definemarginal cost of capital for
me so I can include it in my discussions with investors? You seem to have a
knack for making things accessible to nonfinancial folks.”
“No problem,” you say. “I’m glad my explanations
are so useful!”
For this assignment, complete
the following:
·
Describe capital structure.
·
Determine the WACC given the
above assumptions.
·
Indicate how these might be
useful to determine the feasibility of the capital project.
·
Recommend which is more
appropriate to apply to project evaluation.
·
Definemarginal cost of capital.
