Description of the Assignment:
Refer
to what your instructor wants you to do and/or to submit, as detailed below in
the Deliverables section. Include the real-world (authentic) situation, type of
task to be accomplished, and the sorts of higher-order thinking (analysis,
reasoning, critical thinking, etc.) that were requested and/or shared
throughout your course thus far.
Topics Covered Include:
Weighted
Average Cost of Capital
Valuation
of Equity using the Capital Asset Pricing Model
Book
Value of Debt
Capital
Structure
Capital
Budgeting Technique of Net Present Value
Time
Value of Money (Discounting)
BACKGROUND OF THE PROBLEM:
The
market situation: The risk-free rate is 5% and the market risk premium is
8%. The firm’s corporate tax rate is 35%. The firm has a beta of
1.10.
Common
Stock is listed on the balance sheet of this company at $25 million. The
Total Retained Earnings (meaning RE + Additions to Retained Earnings) is listed
on the balance sheet as $50 million.
Long-term
Debt consists of one outstanding bond issue with a face value of $75 million
dollars, an 8 percent coupon rate and it sells for 93 percent of par.
A
proposed project has expected cash inflows of year 1, $30,000; year 2, $40,000;
year 3, $30,000 and year 4, $40,000. There is no residual value at the
end of year 4.
ANSWER THE FOLLOWING in 5-7
pages (be sure to see paper requirements below for more
expectations):
What
is the cost of equity using the CAPM?
What
is the cost of debt using Book Valuation?
What
is the capital structure of the organization using book values?
What
is the weighted Average Cost of Capital (WACC)?
What
is the Net Present Value of the proposed Project?
Should
the company purchase this project using your computed data? Explain.
What
literature article supports Net Present Value over IRR or Payback?
Please be sure to
address the following requirements when completing your papers:
·
The cover page and reference page/s are not included in the
above-stated page requirement. These should be in addition to page
requirements.
·
Papers need to be formatted
in proper APA 7th Edition style.
·
Each paper requires a minimum of at least three outside peer-reviewed sources for your references (unless
stated otherwise in the guidance above).
o Acceptable/credible sources include: Academic
journals and books, industry journals, and the class textbook. To
include additional types of sources, please review the “Guidelines for finding
and utilizing required references for your paper,” shared below.
·
Using your textbook is highly recommended to demonstrate that you
have read the required material and/or are connecting new thoughts to the
course text/learnings.
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