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Optimal Capital Structure

A firm has determined its cost of each source of capital and optimal capital structure that is composed of the following sources and target market value proportions:

Source of Capital Target market proportions After-tax Cost

Long-term debt 35% 9%
Preferred debt 10% 14%
Common stock equity 55% 20%

The firm is considering an investmet opportunity, which has an internal rate of return of 10 %. The project _______

should not be considered because its internal rate of return is less than the cost of long-term debt, should be considered because its internal rate of return is greater than the cost of debt, should not be considered because its internal rate of return is less than the weighted average of cost of capital, or should be considered because its internal rate of return is greater than the weighted average of cost of capital,

please advise answer & why - thanks so very much!

Solution Preview

weighted average of cost of capital is the sum of the following costs:
Long-term debt ...

$2.19