CHAPTER 11 The Cost of Capital 503a. Complete the cost-of-capital schedule by calculating the WACC and the
WMCC schedule for the various ranges of new financing.
b. Identify those projects that you recommend that Grainger Corp. undertake in
the next year.
c. Illustrate your recommendations by drawing a graph of Grainger’s weighted
average costs and investment opportunities similar to Figure 11.2.
d. Explain why certain projects are recommended and other(s) are not.CHAPTER 11 CASE Making Star Products’
Financing/Investment Decision
S
tar Products Company is a growing manufacturer of automobile accessories
whose stock is actively traded on the over-the-counter exchange. During
2003, the Dallas-based company experienced sharp increases in both sales and
earnings. Because of this recent growth, Melissa Jen, the company’s treasurer,
wants to make sure that available funds are being used to their fullest. Manage-
ment policy is to maintain the current capital structure proportions of 30%
long-term debt, 10% preferred stock, and 60% common stock equity for at least
the next 3 years. The firm is in the 40% tax bracket.
Star’s division and product managers have presented several competing
investment opportunities to Ms. Jen. However, because funds are limited,
choices of which projects to accept must be made. The investment opportunities
schedule (IOS) is shown in the following table.Investment Opportunities Schedule (IOS)
for Star Products Company
Investment Internal rate of Initial
opportunity return (IRR) investmentA 15% $400,000
B 22 200,000
C 25 700,000
D 23 400,000
E 17 500,000
F 19 600,000
G 14 500,000Investment Opportunities Schedule
Investment opportunity Internal rate of return CostProject H 14.5% $200,000
Project G 13.0 700,000
Project K 12.8 500,000
Project M 11.4 600,000