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Misty Ltd wishes to determine its weighted marginal cost of capital. In preparing for this task, it has compiled the following data:
Source of Capital
Target
Range of Financing
After-Tax
Proportion
$
Cost
Long-Term Debt
0.4
0
to
300,000
0.065
300,001
600,000
0.075
600,001
and above
0.090
Preference Shares
0.1
100,000
0.095
100,001
0.100
Ordinary Shares
0.5
500,000
0.11
500,001
1,000,000
0.125
1,000,001
0.14
a) Determine the breaking points and ranges of total financing associated witheach source of capital;
b) Using the data developed determine the levels of total financing at whichthe firm's weighted average cost of capital (WACC) will change;
c) Calculate the weighted average cost of capital and the weighted marginal cost (WMCC) for each range of total financing
d) Using the results along with the information on the available investmentopportunities shown below, compile the firm's investment opportunitiesschedule (IOS), plot this schedule and plot the weighted marginal cost of capital schedule
Investment Opportunities Schedule
Investment
IRR
Initial
Opportunity
A
200,000
B
0.12
C
D
E
0.09
F
0.08
e) Which, if any of the available investments would you recommend that the firm accept? Explain your answer.
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