Reference no: EM1314998

Computation of weighted average cost of capital with given data

What does a company's cost of capital represent and how is it calculated? How do market rates and the company's perceived market risk impact its cost of capital, and how does the company's debt to equity mix impact this cost of capital? Using the information provided, develop a spreadsheet to calculate weighted average cost (WAC) and marginal weighted average cost (MCC) of capital for Strident Marks?
You have developed the following table concerning the cost of capital sources for Strident Marks-

Source of capital	After tax cost
Long term debt	6%
Preferred stock	18%
Common stock equity	20%

Strident Marks capital structure weights used to calculate its WACC are:

Source of Capital	After Tax Cost	Amount Available	After tax cost, After Break Point
Long term debt	6%	200,000	12%
Preferred stock	18%	100,000	25%
Common stock equity	20%	200,000	40%

The future investment opportunities and the corresponding Internal Rate of Return (IRR) follow. As a result of operating its business operations profitably, Strident Marks has $1,000,000 to invest. Considering Strident Marks' weighted average cost of capital and MCC, rank the investment opportunities and indicate which ones would be accepted, which (if any) would be rejected and why.

Investment Opportunity	IRR	Initial Investment
A	20%	$300,000
B	16%	$350,000
C	23%	$300,000
D	15%	$450,000
E	24%	$250,000
F	14%	$400,000
G	22%	$200,000
H	18%	$150,000
I	17%	$100,000