BUS 315 – The Acme Chip Manufacturing Company (potato not computer)
The Acme Chip Manufacturing Company (potato not computer) has a target capital structure of 40% debt and 60% common equity.? They also have a 40% tax rate.? Calculate the “after-tax” cost of debt.They have three projects under consideration code named:Manny, Moe, and Jack. All are independent. The IRRs for the three projects: Manny 16%, Moe 13%, and Jack 10%. All three projects have an initial investment of $1,000,000. Acme can borrrow up to $2,000,000 from the bank at a quoted interest rate (the “before-tax” cost of debt) of 8%.? They also have a reported $3,000,000 in Retained Earnings available for new projects.?Additional information: The next common stock dividend they pay will be $4.00 per share. They also expect a growth rate of 5% on common equity. New common stock can be sold for $50.00 per share, with flotation costs of $10.00 per share.Part 1:a.Which projects would you accept and why?? Please show formula / calculation.b.What would be your capital budget?Part 2: The federal government has decided to increase the regulations affecting the manufacturing of chips. Complying with these new regulations will cost Acme million, wiping out their retained earnings. So now:a. Which projects would you accept and why??b. What would be their capital budget now?
