I need 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?
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 ...
The solution explains how to calculate the WACC and then to use it to make the acceptance/rejection decisions relating to various projects