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    The Masco Corporation is considering expanding its production capacity through three projects totaling $45 million. Project A is expected to return 10%, Project B 9.2%, and Project C 8.7%. To determine the size of its capital budget, Masco must calculate its cost of capital based on information provided about its balance sheet, existing debt, stock price and earnings per share in order to only undertake projects that exceed the cost of capital.

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    Assignment1 COC

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    areeba.fatima.cr7
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    The Masco Corporation is considering expanding its production capacity through three projects totaling $45 million. Project A is expected to return 10%, Project B 9.2%, and Project C 8.7%. To determine the size of its capital budget, Masco must calculate its cost of capital based on information provided about its balance sheet, existing debt, stock price and earnings per share in order to only undertake projects that exceed the cost of capital.

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    The Masco Corporation is considering expanding its production capacity through three projects totaling $45 million. Project A is expected to return 10%, Project B 9.2%, and Project C 8.7%. To determine the size of its capital budget, Masco must calculate its cost of capital based on information provided about its balance sheet, existing debt, stock price and earnings per share in order to only undertake projects that exceed the cost of capital.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    18 views1 page

    Assignment1 COC

    Uploaded by

    areeba.fatima.cr7
    The Masco Corporation is considering expanding its production capacity through three projects totaling $45 million. Project A is expected to return 10%, Project B 9.2%, and Project C 8.7%. To determine the size of its capital budget, Masco must calculate its cost of capital based on information provided about its balance sheet, existing debt, stock price and earnings per share in order to only undertake projects that exceed the cost of capital.

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    © All Rights Reserved
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    of 1

    Business Finance-II

    Class Assignment 1 (August 26, 2023)

    Cost of Capital: MASCO CORPORATION

    The Masco Corporation is expanding its production capacity to introduce a new line of
    products. Current plan calls for expenditure of $45 million on three long-term projects of
    equal size ($15 million each), but with different returns.
    Project Expected Return
    A 10%
    B 9.2%
    C 8.7%

    The book value Balance Sheet on December 31, 2005 is as follows:


    Current assets 50,000,000 Current liabilities 15,000,000
    Long-term debt 60,000,000
    Long-term assets 80,000,000 Common stock 36,000,000
    (1.2 million shares)
    Retained earnings 19,000,000

    Total assets 130,000,000 Debt & equity 130,000,000

    The current liabilities consist entirely of notes payable to banks, and the interest rate on
    this debt is 7.5%, the same as the rate on new bank loans. The long term debt consists
    of two bond issues:
    Issue Coupon Maturity
    20 million, semiannual 6% December 31, 2010
    40 million, semiannual 8% December 31, 2012

    The interest on the new long-term debt is 10% and this is the yield to maturity on these
    existing bonds. Common stock currently (December 31, 05) is selling for $70 a share
    and underwriting costs are estimated at $12 if new shares are issued. Firm has a
    retention ratio of 40 percent. The historical earnings on a per share basis are as follows:
    Year EPS
    2002 4.00
    2003 4.20
    2004 4.41
    2005 4.63

    The investors expect the past trends in EPS to continue. The corporate tax rate is 25%.

    Based on the information about the potential returns on projects and the cost of
    capital, how large the capital investment budget should the firm use?

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