The engineering manager at FXO Plastics wants to complete an alternative evaluation study. She asked the finance manager for the corporate MARR. The finance manager gave her some data on the project and stated that all projects must clear their average (pooled) cost by at least 4%. Use the data to determine the minimum before-tax MARR.
What will be an ideal response?
Total equity and debt fund is $15 million.
Equity WACC = (retained earnings fraction)(cost) + (stock fraction)(cost)
= (4/15)(7.4%) + (6/15)(4.8%)
= 3.893%
Debt WACC = (5/15)(9.8%)
= 3.267%
WACC = 3.893 + 3.267
= 7.16%
MARR = WACC + 4%
= 7.16 + 4.0
= 11.16%
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