Which capital budgeting project should it purchase

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Reference no: EM131394341

Aunt Bea's Barbeque (ABB) has two independent investment opportunities this year: Project S costs $45,000, and it has an IRR equal to 11 percent; Project T costs $52,000 and its IRR is 8 percent. The firm's weighted average cost of capital (WACC) is 9 percent as long as new common stock is not needed to finance capital budgeting projects, but its WACC is 12 percent if new common stock must be issued. ABB's target capital structure is 70 percent debt and 30 percent common equity. The firm expects to generate net income of $39,000 this year. ABB follows stable, predictable dividend policy by increasing its dividend payment by 5 percent each year. If ABB paid $20,000 in dividends last year, and it continues to follow the stable, predictable dividend policy, which capital budgeting project(s) should it purchase?

Reference no: EM131394341

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