A firm\'s cost of borrowed money is 17.3 percent, its cost of capital is 16.4 pe

Question

A firm's cost of borrowed money is 17.3 percent, its cost of capital is 16.4 percent and its opportunity cost is 17.2 percent. In the absence of risk and inflation effects, its MARR should be ________ percent. 1

Under idealized conditions when funds for the marginal investment come from borrowing, when the number of attractive investment projects available to a firm decreases ___________________________.

Select all answers below that make the statement true.

Answer

a. it should borrow more

b. it should borrow less

c. its borrowing should stay the same

Please Explain your answers!

Explanation / Answer

To accept the project one must make sure that the project earns atleast an amount that would cover its costs.

Here :

Cost of borrowed money = 17.3 %

Cost of Capital = 16.4 %

Opportunity cost = 17.2%

The highest among these is the cost of borrowed money. Thus, the Minimum acceptable rate of return must be atleast 17.3% so that the project remains viable.

2) When the number of attractive projects decrease on additional borrowing i.e borrowing for marginal investment, the company should do the following:

If the number of attractive (i.e profitable) offers are available, then the firm may borrow an additional amount.

If there are no more lucrative offers, then the firm should keep borrowing the same

If by investing more by borrowing, the cost of borrowed money is higher than the expected returns (non-attractive offer) then the firm should borrow lesser amount.

Hope this helps.Please ask if you have any doubts. please rate my answer ASAP. thanks

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