26 Jul WHICH DECISION METHOD SEEMS MORE APPROPRIATE? WHY?
Concept of cost of capital Mace Manufacturing is in the process of analyzing its investment decision Show more Concept of cost of capital Mace Manufacturing is in the process of analyzing its investment decision making procedures. Two projects evaluated by the firm recently involved building new facilities in differnt regions North and South. The basic variables surrounding each project analysis and the resulting decision arctions are summarized in the following table a. an analyst evaluating the North facility expects the project will be financed by debt that costs the firm 7%. What recommendations do you think thes analyst will make regarding the investment opportunity? b. Another analyst assged to study the South facility believes that the funding for that project will come from the firms retained earnings at a cost of 16%. What recommendations do you think thes analyst will make regarding the investment opportunity? c. Explain why the decisions in part a and b may not be in the best interest of the firms investors. d. If the firm maintains a capital structure containing 40% debt and 60% equity find it weighted average cost using data in the table. e. If both analysts had used the weighted average cost calculated in part d what recommendations would they ahve made regarding the North and South facilities? f. Compare and contrast the analysts initial recommendation with your finding in part e. Which decision method seems more appropriate? Why? Basic Variables North South Cost $ 6000000 $ 5000000 Life 15 15 Expected Returns 0.08 0.15 Least Cost Financing Source Debt Equity Cost (after-tax) 0.07 0.16 Decision Action Invest Dont Invest Reason .08>.07 .15
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