Principles of Managerial Finance

502 PART 4 Long-Term Financial Decisions

a. Determine the break points and ranges of totalnew financing associated with

each source of capital.

b. Using the data developed in part a,determine the break points (levels of total

new financing) at which the firm’s weighted average cost of capital will change.

c. Calculate the weighted average cost of capital for each range of total new

financing found in part b.(Hint:There are three ranges.)

d. Using the results of part c,along with the following information on the avail-

able investment opportunities, draw the firm’s weighted marginal cost of cap-

ital (WMCC) schedule and investment opportunities schedule (IOS) on the

same set of axes (total new financing or investment on the xaxis and

weighted average cost of capital and IRR on the yaxis).

e. Which, if any, of the available investments do you recommend that the firm

accept? Explain your answer.

11 – 18 Integrative—WACC, WMCC, and IOC Grainger Corp., a supplier of fitness

equipment, is trying to decide whether to undertake any or all of the proposed

projects in its investment opportunities schedule (IOS). The firm’s cost-of-capital

schedule and investment opportunities schedules follow.

Cost-of-Capital Schedule

Range of new financing Source Weight After-tax cost

0 – $600,000 Debt .50 6.3%

Preferred stock .10 12.5

Common stock .40 15.3

$600,000–$1,000,000 Debt .50 6.3%

Preferred stock .10 12.5

Common stock .40 16.4

$1,000,000 and above Debt .50 7.8%

Preferred stock .10 12.5

Common stock .40 16.4

Investment Internal rate of Initial

opportunity return (IRR) investment

A 19% $200,000

B 15 300,000

C 22 100,000

D 14 600,000

E 23 200,000

F 13 100,000

G 21 300,000

H 17 100,000

I 16 400,000

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