A company has 60% debt and 40% equity in its capital structure. The after tax interest rate on debt is 6% and required return of stockholders is 15%. The company has an investment opportunity with an IRR of 12%. Should the company accept this opportunity?

Question

Answer

Yes, because cost of capital of 9.6% is lower than IRR of 12%

Answer

No, because cost of capital of 13.4% is lower than IRR of 12%

Answer

No, as the required return of shareholders (15%) is higher than the IRR (12%)

Answer

Yes, as the IRR of 12% is higher than the cost of debt of 6%

Answer

No, as cost of capital of 12.6% is higher than IRR of 12%

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A company has 60% debt and 40% equity in its capital structure. The after tax in...

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