Saint Leo Manufacturing is going to introduce a new product line and to accomplish this
it has four projects analyzed in which it wants to invest a total of $100 million. Your job is to
find what it will cost to raise this amount of capital and based on the cost of capital determine which of the
projects should be accepted by the firm to invest in.
a. What is the current Kd, Kp and Ke assuming no new debt or stock? And what
is the current cost of capital?
b. At what size capital structure will the firm run out of retained earnings?
c. At that point what will the Kne (cost of new common equity) be? And what will the
cost of capital be?
d. At what size of capital structure will the firm’s cost of debt change?
e. At that point what will the new Knd (after tax cost of debt) be? And what will
the cost of capital be?
f. Given the above summarized the amounts of financing levels and costs of captial
for each level.
g. Rank the projects from highest returns to lowest.
h. Explain what projects are accepted and why and which are rejected and why?
i. Given your answer to h, what then would be the new FMV’s of debt and equities?