NCC Corporation

NCC Corporation

1. NCC Corporation is considering building a new facility in Texas. To raise money for the capital projects,
the corporation plans the following capital structure: 30% of money will come from issuing bonds,
and 70% will come from Retained Earnings or new common stock.
The corporation does not currently have preferred stock.
NCC Corporation will issue bonds with an interest rate of 8%
up to $30 million dollars in bonds.
After issuing $30 million in bonds, the interest cost will rise to 12.5%.
The next dividend on common stock is expected to be $2.00 per share.
The stock price is $25.00 per share, and is expected
to grow at 3% per year. The flotation cost for issuing new common stock is estimated at 10%.
NCC Corporation has $66 million in retained earnings that can be used.
The tax rate for NCC Corporation is 35%.
1. What is the initial Weighed Average Cost of Capital (WACC) for NCC Corporation?
2. There are two breakpoints in NCC's capital structure. At what point does the first breakpoint occur?
3. At what point does the second breakpoint occur?
4. What is the Weighted Average Cost of Capital (WACC) after the first breakpoint?
5. What is the WACC after the second breakpoint?
6. The following projects are available for NCC Corporation to consider choosing.
Cost
Cash Flows Each Year
IRR
Project A
$25 Million
$7 Million for 5 years
12.38%
Project B
$50 Million
$15 Million for 5 years
15.24%
Project C
$30 Million
$7.5 Million for 6 years
13%
Project D
$30 Million
$8.8 Million for 5 years
14.29%
Project E
$40 Million
$11 Million for 5 years
11.65%
Which projects should NCC accept, if any, and in which order should they be chosen?
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