III.MARR Estimation (5 points) Suppose you are to start a business project that
ID: 2802273 • Letter: I
Question
III.MARR Estimation (5 points) Suppose you are to start a business project that would improve the quality of the products that your company produces. You identified that the project will require P15.000,000 in capital. You were informed by the bank that they will be able to extend you a loan amounting to PS 000 000 at 10% annual interest. Furthermore, you identified the following additional sources of capital to finance the implementation of the project with their corresponding cost Source of Fund Common Stock Preferred Stock Debt Retained Earnings3M Determine the MARR that you should use moving forward. Capital 2M 1M 4M Cost of Capital 15% 8% 9% 13%Explanation / Answer
The MARR should be the weighted average of the cost of capital of different sorces of capital
MARR = (5000000/15000000)*cost of loan + (2000000/15000000)*cost of common stock + (1000000/15000000)*cost of preferred stock + (4000000/15000000)*cost of debt + (3000000/15000000)*cost of retained earning
=0.33*0.1 + 0.13*0.15 + 0.067*0.08 + 0.267*0.09+0.2*0.13
=0.033 + 0.018 + 0.0053 + 0.024 + 0.026 = 0.1063 = 10.63%