Finance Problem: Toronto Sports Limited
TSL, a supplier of high-end fitness equipment, has some investment opportunities. Due to capital rationing TSL can spend only up to $2,000,000 in new investment opportunities. TSL has the following information to consider.
Opportunity Cost IRR Cost
Project A 16% $300,000
Project B 14% $500,000
Project C 12% $500,000
Project D 11% $600,000
Project E 15% $700,000
Project F 18% $500,000
The preferred Capital structure for TSL is: DEBT 50%, Preferred 10% and Equity 40%
The Financial manager has also determined that TSL has $120,000 available in retained earnings and they can borrow $250,000 debt without incurring additional financing costs.
The cost of debt, preferred shares and equity are currently 6%, 10% and 18% net to taxes respectively as applicable, The range of new financing cost beyond break points are
First Break point: Debt 8% Preferred 10% (no change) and Equity 18%
Second Break point: Debt 10%, Preferred 10% ( no change) and Equity 20%
Task:
o Compute the Weighted Average Cost of Capital (WACC and complete the Marginal Cost of Capital (MCC) for the Various range of financing.
o Draw the firms marginal cost of capital (MCC) and the Investment Opportunity Schedule (IOS)
o Which of the projects should they select? Why?
o Calculate the overall cost of capital for TSL.
The response must include a reference list. One-inch margins, double-space, Using Times New Roman 12 pnt font and APA style of writing and citations.