Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Hampton Manufacturing estimates that its WACC is 12.5%.
The company is considering the following 7 investment projects:
a. Assume that each of these projects is independent and that each is just as risky as the
firm’s existing assets. Which set of projects should be accepted, and what is the firm’s
optimal capital budget?
b. Now assume that Projects C and D are mutually exclusive. Project D has an
$400,000, whereas Project C has an NPV of $350,000. Which set of projects should be
accepted, and what is the firm’s optimal capital budget?
c. Ignore part b and assume that each of the projects is independent but that management
decides to incorporate project risk differentials. Management judges Projects B,
C, D, and E to have average risk, Project A to have high risk, and Projects F and G to
have low risk. The company adds 2% to the WACC of those projects that are significantly
more risky than average, and it subtracts 2% from the WACC of those projects
that are substantially less risky than average. Which set of projects should be accepted,
and what is the firm’s optimal capital budget?
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