Determine the appropriate require rate of return

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Question 1: Calculate the weighted average cost of capital (WACC) and analyze the case.

The managers of Rocky Mountain Motors are considering the purchase of a new tract of land which will be held for one year. The purchase price of the land is $10,000. RMM's capital structure is currently made up of 40% debt, 10% preferred stock, and 50% common equity. This capital structure is considered to be optimal, so any new funds will need to be raised in the same proportions.

Question 2: Before making the decision, RMM's managers must determine the appropriate require rate of return. What minimum rate of return will simultaneously satisfy all of the firm's capital providers?

Assume the following are the corresponding rates of return:

Cost of debt: 11.67%

Cost of preference capital: 12%

Cost of common equity: 15%

Company falls in the tax bracket of 40%

Reference no: EM132495384

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