1. Kramerica Industries has a capital structure consisting of 65% debt and 35% common stock. The...

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1. Kramerica Industries has a capital structure consisting of65% debt and 35% common stock. The company’s CFO has obtained thefollowing information: o The before-tax YTM on the company's bondsis 8.5%. o Kramerica will pay a $3.00 dividend on its common stockand the dividend is expected to grow at a constant rate of 6% ayear. The common stock currently sells for $50 a share. o Assumethe firm will be able to use retained earnings to fund the equityportion of its capital budget. o The company's tax rate is 35%.
a. What is Kramerica’s WACC?
b. Two independent projects are available forKramerica to invest in: Project A has an IRR of 10%, while ProjectB’s has an IRR of 12.5%. These two projects are equally risky andare of average risk. Which project(s) should Kramerica accept?

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4.4 Ratings (919 Votes)

a WACC calculations i Cost of debt YTM 1 Tax rate Here Tax rate 35 or 035 YTM 85 or 0085 Cost of debt 0085 1 035 Cost of debt 00553 or 553 ii Cost of equity D1 P g Here D1 See Answer

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1. Kramerica Industries has a capital structure consisting of65% debt and 35% common stock. The company’s CFO has obtained thefollowing information: o The before-tax YTM on the company's bondsis 8.5%. o Kramerica will pay a $3.00 dividend on its common stockand the dividend is expected to grow at a constant rate of 6% ayear. The common stock currently sells for $50 a share. o Assumethe firm will be able to use retained earnings to fund the equityportion of its capital budget. o The company's tax rate is 35%.a. What is Kramerica’s WACC?b. Two independent projects are available forKramerica to invest in: Project A has an IRR of 10%, while ProjectB’s has an IRR of 12.5%. These two projects are equally risky andare of average risk. Which project(s) should Kramerica accept?