A firm's marginal cost of capital (i)in percentage terms is a linear function of the total amount it chooses to borrow (K) in millions of dollars during the current time period. The function is i = 5 + 0.8K. The firm is considering six projects that will have to be financed entirely by borrowing. The amount the firm must borrow for each project and the expected rates of return are listed below:
$$\begin{array} { l c c }
\text { Project } & \text { Amount borrowed } ( K ) & \text { Rate of reburn } \
\text { A } & \$ 4.2 & 22 \text { percent } \
\mathrm { B } & 5.8 & 18 \
\text { C } & 3.5 & 16 \
\mathrm { D } & 1.5 & 14 \
\mathrm { E } & 5.3 & 12 \
\mathrm {~F} & 1.7 & 10
\end{array}$$ Which projects should the firm undertake, if any, and what will the firm's marginal cost of capital be if it borrows the optimal amount?

Question

A firm's marginal cost of capital (i)in percentage terms is a linear function of the total amount it chooses to borrow (K) in millions of dollars during the current time period. The function is i = 5 + 0.8K. The firm is considering six projects that will have to be financed entirely by borrowing. The amount the firm must borrow for each project and the expected rates of return are listed below:
 $$\begin{array} { l c c } 
\text { Project } & \text { Amount borrowed } ( K ) & \text { Rate of reburn } \
\text { A } & \$ 4.2 & 22 \text { percent } \
\mathrm { B } & 5.8 & 18 \
\text { C } & 3.5 & 16 \
\mathrm { D } & 1.5 & 14 \
\mathrm { E } & 5.3 & 12 \
\mathrm {~F} & 1.7 & 10
\end{array}$$ Which projects should the firm undertake, if any, and what will the firm's marginal cost of capital be if it borrows the optimal amount?

Quizplus · Accepted Answer

The Answer of A firm's marginal cost of capital (i)in percentage terms is a linear function of the total amount it chooses to borrow (K) in millions of dollars during the current time period. The function is i = 5 + 0.8K. The firm is considering six projects that will have to be financed entirely by borrowing. The amount the firm must borrow for each project and the expected rates of return are listed below:
 $$\begin{array} { l c c } 
\text { Project } & \text { Amount borrowed } ( K ) & \text { Rate of reburn } \
\text { A } & \$ 4.2 & 22 \text { percent } \
\mathrm { B } & 5.8 & 18 \
\text { C } & 3.5 & 16 \
\mathrm { D } & 1.5 & 14 \
\mathrm { E } & 5.3 & 12 \
\mathrm {~F} & 1.7 & 10
\end{array}$$ Which projects should the firm undertake, if any, and what will the firm's marginal cost of capital be if it borrows the optimal amount?

A Firm's Marginal Cost of Capital (I)in Percentage Terms Is