Reference no: EM132699336
The Acme Chip Manufacturing Company (potato not computer) has a target capital structure of 40% debt and 60% common equity. They also have a 40% tax rate. They have three projects under consideration code named: Manny, Moe, and Jack. All are independent. The IRRS for the three projects: Manny 16% Moe 13% Jack 10% All three projects have an initial investment of $1,000,000. Acme can borrow up to $2,000,000 from the bank at a quoted interest rate of 8%. They also have a reported $3,000,000 in Retained Earnings available for new projects. Additional Information: The next common stock dividend they pay will be $4.00 per share. They also expect a growth rate of 5% on common equity. New common stock can be sold for $50.00 per share, with flotation costs of $10.00 per share.
Part 1: A. Which projects would you accept and why?
B. What would be your capital budget?
Part 2: Let's change one thing. The federal government has decided to increase the regulations affecting the manufacturing of chips. Complying with these new regulations will cost Acme $3 million, wiping out their retained earnings. So now:
A. Which projects would you accept and why?
B. What would be their capital budget now?
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