Case 2

Case 5 -ADDITIONAL QUESTIONS/COMMENTS

You do not need any information in Table 1.

Note (6) under Table 1: The note is worded a little odd, but states that the Market Risk Premium is 6% and the Beta is 1.2.

Note (8) under Table 1: You do not need any depreciation information for the case.

Note (10) under Table 1: Where it says “60% common stock” would be better worded as “Common Equity”, which is both Common Stock and Retained Earnings.

NOTE for Question #6: Use 4% for your Risk Premium when using the “Bond Yield plus Risk Premium Method”.

NOTE for Question #7: Use the simple average of the three answers you got in 4b, 5a, and 6, for your final estimate for ks.

Data needed that is not in the case: Telecommunications Services believes that the company can obtain only $5,000,000 of debt at the cost of debt percentage you found in Q#2a. If they need more than $5,000,000 of debt to finance their Capital Budget then all of their debt will cost 12%, before taxes.

The firm has also developed the following list of potential projects:

Project Initial Cost IRR

A $4,000,000 15.4%

B $3,000,000 13.5%

C $5,000,000 12.9%

D $3,000,000 11.2%

9a. Based on the above additional data and your answers to the previous case questions, construct the company’s WACC schedule and MCC/IOS graph. Be sure to include the breakpoints, a table showing your WACC calculations, and an MCC/IOS graph.

Note: MCC – Marginal Cost of Capital. This is the graph of the various WACC’s.

IOS – Investment Opportunities Schedule. This is the part of the graph that shows the IRR’s.

Note: In answering this you will need to construct a spreadsheet and graph similar to the “WACC/MCC Example” posted to BB.

b. Based on your MCC/IOS graph, which projects should the company accept (i.e. what is the company’s Optimal Capital Budget?) Explain why.

c. Which WACC should be...