The following information relates to Toronto Ltd: - Net income for the current year is $3...
The following information relates to Toronto Ltd:
- Net income for the current year is $3 million
- The after-tax cost of debt is 4.88%
- Target capital structure weightings are 30% debt, 20% preferred, with the remaining amount in equity
- The weighted average cost of capital for the firm is 9%
- Below is a list of possible capital projects and the company has $15 m of available funds:
Project Name Project Size Project IRR
YG $3.1 million 10.5%
LH $3.5 million 9.25%
NS $3.0 million 8.9%
OT $2.75 million 8.5%
Which projects or projects should the company undertake?
A. All of the projects as the total project costs are less than $15 m
B. Only OT as the project cost is less than the net income for the year
C. Only YG and LH as these project IRRs are higher than the weighted average cost of capital
Homework Answers
C. Only YG and LH as these project IRRs are higher than the weighted average cost of capital
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