you explored how companies compute their cost of capital by computing a weighted average of the three major components of capital: debt, preferred stock, and common equity
For this Discussion, imagine the following scenario:
You are the director of operations for your company, and your vice president wants to expand production by adding new and more expensive fabrication machines. You are directed to build a business case for implementing this program of capacity expansion. Assume the company’s weighted average cost of capital is 13%, the after-tax cost of debt is 7%, preferred stock is 10.5%, and common equity is 15%. As you work with your staff on the first cut of the business case, you surmise that this is a fairly risky project due to a recent slowing in product sales. As a matter of fact, when using the 13% weighted average cost of capital, you discover that the project is estimated to return about 10%, which is quite a bit less than the company’s weighted average cost of capital. An enterprising young analyst in your department, Harriet, suggests that the project be financed from retained earnings (50%) and bonds (50%). She reasons that using retained earnings does not cost the firm anything, since it is cash you already have in the bank and the after-tax cost of debt is only 7%. That would lower your weighted average cost of capital to 3.5% and make your 10% projected return look great.
1. Student provides a thorough and detailed explanation of his/her reaction to Harriets suggestion, evaluating Harriets idea and providing a strong rationale for his/her position.
2. Student provides a thorough and detailed evaluation analyzing whether or not capital projects should have their own unique cost of capital rates for budgeting purposes, including a strong rationale for conclusions drawn, evaluating the relatively high risk inherent in Harriet’s project, and recommending whether or not it should be budgeted at higher risk.
3. Student provides a thorough and detailed explanation of how he/she would factor the notion of risk into the analysis so that all competing projects that have relatively lower or higher risks can be evaluated on a level playing field. Student provides strong rationale for his or her approach to factoring in risk for such purposes.
4. Writing is clear, logical, well-organized and appropriate. Work is free from spelling and grammar/syntax errors. Tone is professional and free from bias (i.e., sexism, racism). There are no errors.
Collepals.com Plagiarism Free Papers
Are you looking for custom essay writing service or even dissertation writing services? Just request for our write my paper service, and we'll match you with the best essay writer in your subject! With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers.
Get ZERO PLAGIARISM, HUMAN WRITTEN ESSAYS
Why Hire Collepals.com writers to do your paper?
Quality- We are experienced and have access to ample research materials.
We write plagiarism Free Content
Confidential- We never share or sell your personal information to third parties.
Support-Chat with us today! We are always waiting to answer all your questions.
