Project Acceptance/Rejection
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Please help to get this question done. Which formula need to be used to calculate which project will be accepted?
Jackson Corporation is evaluating the following four independent, investment opportunities:
Project Cost Rate of Return
A $300,000 14%
B 150,000 10
C 200,000 13
D 400,000 11
Jackson's target capital structure is 60% debt and 40% equity. The yield to maturity on the company's debt is 10%. Jackson will incur flotation costs for a new equity issuance of 12%. The growth rate is a constant 6%. The stock price is currently $35 per share for each of the 10,000 shares outstanding. Jackson expects to earn net income of $100,000 this coming year and the dividend payout ratio will be 50%. If the company's tax rate is 30%, which of the projects will be accepted?
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Solution Summary
The solution explains how to calculate the WACC and then to use it to make the acceptance/rejection decisions relating to various projects.
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In order to decide which project will be accepted, we need to compare the Rate of return on the project with the WACC of the company. If Rate of return > WACC we accept the project, else we reject the project.
Next step is to calculate the WACC.
WACC = Proportion of debt X after tax cost ...
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