Question

Bradford, Inc is evaluating the following projects based on their weighted average cost of capital. Assume Bradford can raise money at the rate of 11% using the combination of debt and retained earnings, and at the rate of 14% if they use the combination of debt and a new issue of common stock. Bradford does not use preferred stock. If Bradford can raise $40,000,000 at the 11% rate, which of the following project(s) should they undertake? Project Cost Return A $30,000,000 18.0% B $10,000,000 16.0% C $10,000,000 15.0% D $20,000,000 12.0%

Answer 1

Answer:

Explanation:

Projects which has highest return shall be accepted.

Assuming brad ford can take up to $40,000,000 at the rate of 11 % and more funds at 14 % cost of capital.

Now we will calculate weighted average return for each combination

For a and b = (30×18+ 10×16)/40 = 17.5

For second option

(20×12 + 10×15 +10×16)/40 = 13.75

So projects A and B shall be accepted