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Weighted Average Cost of Capital Assignment | Homework For You

Author:
June 9th, 2020

Bam Corporation is considering the following independent projects for the coming year. Their target capital structure is 60 percent debt and 40 percent equity. The after-tax cost of debt is 6 percent and the cost of equity is 15 percent.Homework For You

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Expected

Required                                Rate of                          Risk

Project              Investment                               Return                         Level

A                   $13 million                                17%                              High

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B                     16 million                                9                                 Low

C                     25 million                                 14                               Average

D                   10 million                                8                                 Low

E                      18 million                                 16                               High

Bam adjusts its WACC for risk by adding 2% to the WACC for high-risk projects and subtracting 1.0% for low-risk projects.

Required:

  1. Determine the WACC for Bam Corporation.
  2. Determine which projects Bam Corporation should accept and what would be the dollar size of its capital budget. Get Finance homework help today

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