Question

A firm has determined its cost of each source of capital and optimal capital structure which is composed of the following sources and target market value proportions.

Source of capital	Target Market Proportions	After-tax Cost
Long-term Debt	35%	9%
Preferred Stock	10	14
Common Stock Equity	55	20

The firm is considering an investment opportunity, which has an internal rate of return of 18 percent. The project

		should not be considered because its internal rate of return is less than the cost of long-term debt.
		should be considered because its internal rate of return is greater than the cost of debt.
		should not be considered because its internal rate of return is less than the weighted average cost of capital.
		should be considered because its internal rate of return is greater than the weighted average cost of capital.

Answer 1

Se WACC ( cost of capital) ko We x kg) + (Wd xkd) + (Wpx Kp) | = ( 5SX02) +(0, 35 K001)+(0.70 10.1 % = 0.11 +0.0315 + 0.014 = 0.1555 0) 15.55) | IRR of Proged (Investment opboz tunity) 0 = 184 IRR Rule States that if internal sate of return (IRR) is greater than WACC or cost of capital, then the Project should be accepted. since in the given case IRR (184) is greater than a Ko (15:557) 0 We should accept the project Tobtiond, should be considered because Tits internal rate of return is greater than WACC.