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Frank Sikana
May 5, 2009, 07:23 AM
The Grape Belt Liquidizing Company has been successfully producing and marketing fruit juice from the vineyards and orchards around the BOLAN. Expansion and maintenance of these operations is estimated to require capital investment amounting to $63million. Such investment typically yields a return of 15% per year. A new natural spring has been discovered in the area and preliminary tests indicate the mineral waters to be of a quality to match even the best waters from France. An amount of $138million would be required to bring the spring to full production and to bottle and market the product, both locally and overseas. This investment is expected to generate a return of approximately 20% per year.


The following details may be relevant:

Dividend (stable amount) 130 cents per share
Shares issued 35 million
Current earnings $125.5million
Market price of shares $26.00 each
Debt ratio 40%
Cost of debt 12%
Cost of equity 15%
Effective tax rate 29%
Cost of issuing new share 100 cents per share


A) Assuming all the projects are undertaken, what is the cost of capital before and after the investments?
B) Should all the projects be undertaken?

Curlyben
May 5, 2009, 07:28 AM
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