Peter Natt owns a small start-up company, and wants to expand his business. In order to do so, he is soliciting capital investments and loans. He has incorporated his company, and plans to issue stock and take out a bank loan in order to finance the expansion. He projects that the funds invested now will produce returns of 10% per year. Following is information related to the capital sources Peter plans to use.
Common stock issuance: 70% of total funds, investors expect company growth to result in 6% increase in stock value per year
Bank loan: 30% of total funds, requires 18% interest per year
Peter is also interested in making sure that he also profits from the project, and he will only accept the project if the rate of return exceed the cost of capital by at least 2 percentage points. Does the proposed project clear Peter's hurdle rate?

Question

Quizplus · Accepted Answer

The Answer of Peter Natt owns a small start-up company, and wants to expand his business. In order to do so, he is soliciting capital investments and loans. He has incorporated his company, and plans to issue stock and take out a bank loan in order to finance the expansion. He projects that the funds invested now will produce returns of 10% per year. Following is information related to the capital sources Peter plans to use.
Common stock issuance: 70% of total funds, investors expect company growth to result in 6% increase in stock value per year
Bank loan: 30% of total funds, requires 18% interest per year
Peter is also interested in making sure that he also profits from the project, and he will only accept the project if the rate of return exceed the cost of capital by at least 2 percentage points. Does the proposed project clear Peter's hurdle rate?

Peter Natt Owns a Small Start-Up Company, and Wants to Expand