FIN300 – Principles of Finance for the Private Sector

xecutive Summary The data compiled by North Sea Oil contains information relative to the current costs of its sources of external capital which includes long term debt of 7%, preferred stock of 19%, and common stock equity of 20%. The company’s target capital structure based on the weighted average cost of capital involves 25% of long term debt, 25% of preferred stock, and 50% of common stock and retained earnings. There are two projects that are under evaluation for possible investment opportunities. The first project referred to as Project A has a total required investment of $130,000 with cash inflows over 5 years and a pay-back period of 3.5 years. The second project referred to as Project B has a total required investment of $85,000 with cash inflows over 5 years and a pay-back period of 2.3 years. Both projects are broken down by market value equity of 75% and market value debt of 25%. The total weighted average cost of capital is 16.5% with 1.75% of long term debt, 4.75% of preferred stock, ad 10% common stock equity. The market value equity for Project A is $97,500 compared to Project B’s $63,750. The market value debt for Project A is $32,500 compared to Project B’s debt value of $21,250