Description
ATTACHED ARE MY RESULT FOR THIS ASSIGNMENT AND THE TURNITIN REPORT. I NEED REWORDED SO THAT THE ORIGINALITY IS LESS THAN 10%
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:“Great,” you say. “Thanks.”
- 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%
“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 define marginal 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.
- Define marginal cost of capital.
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Explanation & Answer
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Running Head: CAPITAL BUDGETING
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Capital Budgeting
Name
Institution Affiliation
Course
Date
CAPITAL BUDGETING
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Capital Budgeting
Description of capital structure
Capital structure is the process of how the company funds its operations and growth with
the use of various sources of funds. For this case, it should be noted that the debt takes the form
of “long-term notes payable or bond issues” (Fabozzi & Peterson, 2003). Equity is established as
retained earnings, preferred stock and common stock. At times, short-term debt; just like
working capital requirement, is built to be consistent of the capital structure. The capital structure
of a firm may be a combination of common equity, short-term debt, long-term debt and preferred
equity (Chandra, 2008).
In instances whereby the firm has not long-term and short-term debts, such is considered
when the capital structure of the frim is being analyzed. For this particular company, there
should be the ability to establish that the capital structure reflects the debt-to-equity rat...