Calculate component costs

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XYZ Company has 40% debt 60% equity as optimal capital structure. The nominal interest rate for the company is 12% up to $5 million debt, above which interest rate rises to 14%. Expected net income for the year is $17,5 million, dividend payout ratio is 45%, last dividend distributed was $4,5/share, P0 = $37, g=5%, flotation costs 10% and corporate tax rate is 40%.

a. Find the break points

b. Calculate component costs (cost of each financing source)

c. Calculate WACCs.

d. Two projects are available:

1st. Project requires 15 million initial investments, IRR=18%

2nd. Project requires 10 million initial investments, IRR=12% Please find the optimal capital budget. (Project(s) to be invested in)

Reference no: EM132555057

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