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Ike's Corporation considers its optimal structure to be 40 percent debt and 60 percent common stock. Ike can borrow unlimited amounts at 10 percent. The common stock can be issued with a required return of 15%. Ike has a tax rate of 30 percent.
Ike is considering four investment proposals:
Expected Level of Investment
Project Return Risk Required
A 15% High $ 20,000,000
B 8% Low $ 5,000,000
C 17% High $25,000,000
D 12% Average $ 10,000,000
When Ike evaluates a project, they consider the level of risk. If the risk level is high, Ike adds a premium of three percent to the WACC. If the risk level is low, Ike subtracts one percent.
a) Determine Ike weighted average cost of capital (WACC).
b) Determine Ike optimal capital budget.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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