Determine which projects should be selected

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Reference no: EM13335423

North Sea Oil has compiled the following data relative to current costs of it basic sources of external capital- long term debt, preferred stock, and common stock equity- for variant ranges of financing.

Source of Capital Cost Range of Total New Financing

Long- term debt 7% $0-$2,000,000

8% $2,000,001- $3,000,000

10% $3,000,001 and above

Preferred Stock 19% $0-$960,000

21% $960,001- and above

Common Stock 20% $0-$700,000

24% $700,001- %1,600,000

26% $1,600,001-$2,200,000

30% $2,200,001 and above

The firm expects to have $350,000 of current retained earnings in the coming year at a cost of 20 percent; once these retained earnings are exhausted, the firm will issue new common stock. The company's target capital structure proportions are used in calculating the weighted average cost of capital follow.

Source of Capital Target Capital Structure

Long term debt 0.25

Preferred Stock 0.25

Common stock equity 0.50

Calculate the firm's cost of capital for $2,000,000 of total capital budget.

Given the following information on the available investment opportunities below, determine which projects should be selected

Investment Opportunity Initial Investment Internal Rate of Return

A 400,000 22%

B 500,000 21%

C 400,000 19%

D 400,000 17%

E 600,000 16%

F 700,000 16%

Reference no: EM13335423

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