Which, if any, of the available investments would you recommend that the firm accept? Explain

CHAPTER 11 CASE

Making Star Products’ Financing/Investment Decision Star Products Company is a growing manufactures of automobile accessories whose stock is actively traded on the over-the-counter market. During 2009, the Dallas-based company experienced sharp increases in both sales and earnings. Because of this recent growth, Melissa Jen, the company’s treasurer, wants to make sure that available funds are being used to their fullest. Management policy is to maintain the current capital structure proportions of 30% long-term debt, 10% preferred stock, and60% common stock equity for at least the next 3 years. The firm is in the 40% tax bracket.Star’s division and product managers have presented several competing investment opportunities to Jen. However, because funds are limited, choices of which projects to accept must be made. The investment opportunities schedule (IOS) is shown in the below table.Investment Opportunities Schedule (IOS)For Star Products Company Investment Opportunity Internal rate of return (IRR) Initial Investment A. 15% $400,000B. 22% $200,000C. 25% $700,000D. 23% $400,000E. 17% $500,000F. 19% $600,000G. 14% $500,000To estimate the firm’s weighted average cost of capital (WACC), Jen contacted a leading investment banking firm, which provided the financing cost data shown in the following table.

Financing Cost Data Star Products Company Long-term debt: The firm can raise $450,000 of additional debt by selling 15year, $1,000 par value, 9% coupon interest rate bonds that pay annual interest. It expects to net $960 per bond after flotation cost. Any debt in excess of $450,000 will have a before-tax cost, r-d of 13%Preferred stock: Preferred stock, regardless of the amount sold, can be issued with a $70 par value and a 14% annual dividend rate and will net $65 per share after flotation costs.Common stock equity: The firm expects dividends and earnings per share to be$0.96 and $3.20, respectively, in 2010 and to continue to grow at a constant rate of 11%per year. The firm’s stock currently sells for $12 per share. Star expects to have$1,500,000 of retained earnings available in the coming year. Once the retained earnings have been exhausted, the firm can raise additional funds by selling new common stock, netting $9 per share after underpricing the flotation costs.

A.)

a. Calculate the cost of each source of financing, as specified:

a. Long-term debt, first $450,000

b. Long-term debt, greater than $450,000

c. Preferred stock, all amounts

d. Common stock equity, first $1,500,000

e. Common stock equity, greater than $1,500,000

B.)

Find the break points associated with each source of capital, and use them to specifyeach of the ranges of total new financing over which the firm’s weighted average cost of capital (WACC) remains constant.

C.)

Calculate the weighted average cost of capital (WACC) over each of theranges of total next financing specified in part b.

D.)

Using the findings in part c along with the investment opportunities schedule(IOS), draw the firm’s weighted marginal cost of capital (WMCC) and IOS on the same set of axes (total new financing or investment on the x axis on weighted average cost and IRR on the y axis)

E.)

Which, if any, of the available investments would you recommend that the firm accept? Explain

Homework Market
Calculate your paper price
Pages (550 words)
Approximate price: -

Why Homework Market

HomeworkMarket

Quality Researched Papers

We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.

Homework Market

Qualified Writers

We have hired a team of professional writers experienced in academic and business writing. Most of them are native speakers and PhD holders able to take care of any assignment you need help with.

HomeworkMarket

Unlimited Revision

If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account.

HomeworkMarket

Timely Delivery

All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. We will always strive to deliver on time.

HomeworkMarket

Original & Confidential

We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text.

HomeworkMarket

Customer Support 24/7

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

Calculate the price of your order

Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Homework Market

Place your order

Fill in the order form and provide all details of your assignment.

Homework Market

Proceed with the payment

Choose the payment system that suits you most.

Homework Market

Receive the final file

Once your paper is ready, we will email it to you.

Homework Market Writing Services

No need to work on essay at night. Sleep tight, we will cover your back. We offer all kinds of essay writing services.

HomeworkMarket HomeworkMrket

Essays

Essay Writing Services

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.

HomeworkMarket HomeworkMarket

Admissions

Admission Essays

An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.

HomeworkMarket HomeworkMarket

Editing

Essay Editing

Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.

HomeworkMarket HomeworkMarket

Research Paper

Research Paper

If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied.