Discuss the connection between capital budgeting decisions

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The Expanding Capital Corporation has a current capital structure of $15 million in secured bonds paying 6.5% annual interest, $10 million in preferred stock with a par value of $50 per share and an annual dividend of $3.80 per share, and common stock with a book value of $75 million. It is about to issue new debentures in the amount of $10 million paying 7.5% annual interest. Its CFO says its marginal tax rate is 30% and its cost of common equity capital is 12%. Calculate the company's Weighted Average Costs of Capital for the following:

  1. Before the new bond issue
  2. After the new bond issue

Then, discuss the connection between capital budgeting decisions and the enterprise's cost of capital. Would an enterprise ever decide to embark on a project whose rate of return would be less than its cost of capital? Why or why not?

Reference no: EM132589689

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