Maurice Tutor

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Category > Management Posted 30 Sep 2017 My Price 7.00

Cantona Industries

Cantona Industries has a target captial structure consisting of 40% debt, 5% preferred stock, and 55% common equity. The before-tax YTM on Cantona's long-term bonds is 9.5%, its cost of preferred stock is 8%, and its cost of retained earning is 12.5%. IF the firm's tax rate is 40%, what si Cantona's WACC if it doesn't have to issue new common stock?

 

Cantona Industries undertakes a variety of projects with different levels of risk. Cantona adds 2 percentage points to its WACC for high-risk projects and subtracts 2 percentage points from its WACC for low-risk projects. In other words, the cost of capital for a high-risk project equals WACC + 2%, while a low-risk project uses a cost of capital equal to WACC - 2%. WACC remains the same for average-risk projects.

Cantona's managment is considering the following lost of projects, and each project's risk is indicated in the table below. Indicate which projects Cantona Industries should accept:

 

Project Expected Rate of Return Risk Accept?

A 10.7% High Y/N

B 10.4% Average Y/N

C 12.7% High Y/N

D 8.5% Low Y/N

E 8.6% Average Y/N

F 6.7% Low Y/N

G 9.1% Low Y/N

H 10.9% Average Y/N

Answers

Maurice Tutor
(5)
Status NEW Posted 30 Sep 2017 09:09 AM My Price 7.00

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