What is the optimal capital budget

Assignment Help Accounting Basics
Reference no: EM132461654

Problem - The management of Flannigan Phosphate Industries (FPI) is planning next year's capital budget. FPI projects its net income at $7,500, and its payout ratio is 40 percent. Depreciation is forecasted at $3,000. The company's earnings and dividends are growing at constant rate of 5 percent; the last Dividend, D0, was $0.90; and the current stock price is $8.59. FPI's new debt will cost 14 percent. If FPI issues new common stock, flotation casts will be 20 percent. FPI is at its optimal capital structure, which is 40 percent debt to 60 percent equity, and the firm's marginal tax rate is 40 percent. FPI has the following independent, indivisible, and equally risky investment opportunities:

Project

Cost

IRR

A

$15,000

17%

B

$20,000

14%

C

$15,000

16%

D

$12,000

15%

Management neglected to incorporate project risk differentials into the analysis. FPI's policy is to add 2 percentage points to the cost of capital of those projects significantly more risky than average and to subtract 2 percentage points from the cost of capital of those which are substantially less risky than average. Management judges Project A to be of high risk, Projects C and D to be of average risk, and Project B to be of low risk. No projects are divisible.

Required - What is the optimal capital budget after adjustment for project risk?

Reference no: EM132461654

Questions Cloud

Name social institution better for behind veil of ignorance : Name a social institution/practice/standard that would be better decided "behind the veil of ignorance." Why is it mistaken currently
How do plan to use digital and social media : What can you and your peers do to prepare for this change in the future? Share any additional resources that may be helpful for emerging professionals
Determining the two-sample hypothesis testing : Can this be tested using two-sample hypothesis testing? Explain why or why not. Assume that it could be done: how would you do it?
What are the risks of using harry potter 7 data : a. What are the risks of using Harry Potter 7 data in predicting your new demand curve for the Harry Potter sequel? (15%)
What is the optimal capital budget : The company's earnings and dividends are growing at constant rate of 5 percent; What is the optimal capital budget after adjustment for project risk
How does issue and event provide a social commentary : In what ways does the social science lens help articulate a deeper understanding of the social issue(s) that inform your issue/event?
Test the hypothesis that the population mean age : The population standard deviation s is unknown. Instead the sample standard deviation s is also calculated from the sample and is found to be 5.5.
ECO206Y5 Microeconomic Theory Assignment : ECO206Y5 Microeconomic Theory Assignment Help and Solution, University of Toronto Mississauga - Assessment Writing Service - Identify the policy issue
How will merchandise the garment : How will you merchandise these garments and promote the benefits of being an eco-friendly collection? How will buyers and other retailers respond

Reviews

Write a Review

Accounting Basics Questions & Answers

  Write an exercise with 10 questions include 3-4 questions

write an exercise with 10 questions. include 3-4 questions related to navigation and associated with recieveable

  What are the key features of the tax agent services act 2009

FNSBKG404 Why did the government introduce the Superannuation Guarantee charge? What is the current rate and how is it worked out?

  Discuss the accounting treatment for the franchise

The legal life is five years but can be renewed at 5000 for another five years. Discuss the accounting treatment for the franchise.

  Assume sales at its european location

Review the chapter's opening feature about Karen Cooper, and her start  up company, SmartIT Staffing. Assume that she is considering expanding her business to open an office in Europe. Assume her current income statement is as follows.

  Compute cash collections from customers for each month

Bruno Industries expects credit sales for January, February, and March to be $207,890, $266,960, Compute cash collections from customers for each month

  Compute the cost of goods destroyed

Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Merchandise on hand on January

  Identify any long-term investment instruments you use or

identify any long-term investment instruments you use or have used in the past if you havent used any identify those

  Prepare an incremental analysis for judy jean

Judy Jean, a recent graduate of Rolling's accounting program, evaluated the operating performance. Prepare an incremental analysis for Judy Jean.

  Describe the purpose of a bank transfer scheduleidentify

during your audit of miles company you prepared the following bank transfer schedule miles company bank transfer

  Determine the interest expense to be recorded

Determine the maturity date for each of the three notes described. Determine the interest expense to be recorded in 2011

  Dampf inc has provided the following data concerning its

dampf inc. has provided the following data concerning its only product. selling price 200 per unit current sales 18800

  Discuss a conceptual frameivort of accounting

How does the freedom from bias mentioned in ASOBAT compare to the quality of neutrality mentioned in SFAC No.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd