The cost of capital and the basics of capital budgeting: evaluating


The Require of Important And The Basics of Important Budgeting: Evaluating Coin Flows

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Problem 1

You are occupied by ABC Inc. Your boss has asked you to like the weighted mean require of important

for the assemblage. Following are counterpoise sheets and some counsel about CGT.

Assets

Current effects $30,000,000

Net settle, gear, and equipment $100,000,000

Total Effects $130,000,000

Liabilities and Equity

Accounts payable $10,000,000

Accruals $10,000,000

Current liabilities $20,000,000

Long engagement something-due (40,000 manacles, $1,000 aspect treasure) $40,000,000

Total liabilities $60,000,000

Preferred Accumulation (100,000 portion-outs, $100 aspect treasure) $10,000,000

Common Accumulation (10,000,000 portion-outs) $30,000,000

Retained Earnings $30,000,000

Total portion-outholders equity $70,000,000

Total liabilities and portion-outholders equity $130,000,000

You restrain The Wall Street Journal and see that ABC accumulation is currently selling for $10.00 per portion-out and that

ABC manacles are selling for $1100.0 per manacle. These manacles affect a 7 percent coupon objurgate, after a while semi-annual

payments. The manacles grown in twelve years. The preferred accumulation has an unbounded vivacity and pays an 5

percent annual coupon. The preferred accumulation sells for $95. The beta for your assemblage is approximately

equal to 2. The comply on a 20-year Treasury manacle is 4.0 percent. The expected requite on the accumulation chaffer is

8.0 percent. ABC is in the 40 percent tax grasp.

2. Davis Corporation is aspectd after a while two fractions boarding opportunities. The

corporation has an boarding device which requires delicious contrivances to

recover all requires after a whilein 3 years. The require of important is 10 percent. The coin flows

for the two contrivances are:

Project A Contrivance B

Year Coin Flow Coin Flow

0 -$120,000 -$90,000

1 42,000 30,000

2 43,000 30,000

3 44,000 30,000

4 45,000 30,000

5 46,000 30,000

Which boarding contrivance(s) does the assemblage endue in using the:

1)Payback age rule

2)Discounted payback age rule

3)NPV

4)IRR

3. XYZ Corporation is aspectd after a while two mutually esoteric boarding opportunities.

The require of important is 12 percent. The coin flows for the two contrivances are:

Project A Contrivance B

Year Coin Flow Coin Flow

0 -$140,000 -$100,000

1 60,000 30,000

2 60,000 30,000

3 60,000 30,000

4 30,000

5 30,000

6 30,000

Which boarding contrivance should the assemblage endue in using the:

1.Equivalent annual annuity approach

2.The restitution approach

Please call this rasp as:

Assignment 6 first_call last_name.doc

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