TSL , a supplier of high-end fitness equipment, has some

 

TSL , a supplier of high-end fitness equipment, has some investment opportunities. Due to capital rationing TSL can spend only up to $2,000,000 in new investment opportunities. TSL has the following information to consider.

Opportunity Cost     IRR       Cost   

Project A                 16%        $300,000

Project B                14%         $500,000

Project C                12%        $500,000

Project D                11%        $600,000

Project E                15%        $700,000

Project F                18%         $500,000

The preferred Capital structure for TSL is: DEBT 50%, Preferred 10% and Equity 40%

The Financial manager has also determined that TSL has $120,000 available in retained earnings and they can borrow $250,000 debt without incurring additional financing costs.

The cost of debt, preferred shares and equity are currently 6%, 10% and 18% net to taxes respectively as applicable, The range of new financing cost beyond break points are

First Break point: Debt 8% Preferred 10% (no change) and Equity 18%

Second Break point: Debt 10%, Preferred 10% ( no change) and Equity 20%

Required::

A) Compute the Weighted Average Cost of Capital ( WACC and complete the Marginal Cost of Capital (MCC) for the Various range of financing.

B) Draw the firms marginal cost of capital (MCC) and the Investment Opportunity Schedule (IOS)

C) Which of the projects should they select? why?

D) Calculate the overall cost of capital for TSL

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