Homework Answers
| Cost of debt | 7.50% |
| Cost of equity | |
| up to Rs. 200,000 | 20% |
| above Rs. 200,000 | 28% |
| Weightage of debt | 45% |
| Weightage of equity | 55% |
| Total capital at 200,000 equity | 363,636.36 |
| =200000/0.55 | |
| Hence, WACC will change at this level- aka Break Point | |
| WACC | |
| up to Rs. 363,636 | 14.375% |
| above Rs. 363,636 | 18.775% |
The firm has enough capital to invest and undertake any of the
listed projects. We only have investment cost given and not the
NPV. Hence, our decision is based only on the IRR. The general rule
is accept the project with highest IRR, given that it is greater
than the firm's cost of capital. In this case, all the projects
could be funded with existing equity, without issuing new capital.
However, only investment A has IRR greater than the WACC. Hence,
the firm should undertake investment A.
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