Finance Course Project

We can see that the net present value of the project is negative when the level of production is 300.

If the debt had not been recently traded, then other methods of estimating the cost of debt are by estimating the cost of new BBB rated issues of other firms.

Suppose Ace, over the last few years, has had an 18 percent average return on equity (ROE) and has paid out 20 percent of its net income as dividends. Under what conditions could this information be used to help estimate the firm’s expected future growth rate, g? Estimate ks using this procedure for determining g.

∆P/P = –D*(∆y) D* = D/(1 + y) = 7/1.073 = 6.52 ∆P/P = –D*(∆y) = –6.52(–0.09%) = .59% New price = $1,073(1.0059) = $1,079.33 Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.

For each of the scenarios that follow, define whether the project is a profit-enhancing, cost-control, or publicimprovement program. If possible, define the scenario further as an expansion, replacement, or abandonment

To calculate the cost of debt and equity for this project, we combined the risk-free rate with a risk premium based on the market risk premium and the riskiness of Southwest Airlines.

The Internal Rate of Return appears to be higher than the established investment opportunity hurdle rate of 15 percent therefore it would be a good idea to accept this investment opportunity.

8. How sensitive is the Net Present Value of the project to the cost of capital?

Question 1 – Methods Used to evaluate the investment using the payback, discounted payback, ARR, NPV, PI, IRR, MIRR and equivalent annual annuity methods.

4. Your corporation has a Book Value of long-term debt = $2,000,000. The bonds were issued with a original maturity of 20 years and were sold at Par but the issue occurred 10 years ago. Coupon rate = 8% and paid semiannually. The price is 98 (Hint: this is way bonds are priced. 25pts

O’Grandy Apparel Company can calculate the after tax debt cost using YTM (CP + (FV-Nd /n) / FV +Nd /2) *2. Cp is (0.12/2) * 1000= 60 Semi-annually Fv is 1000 Nd is 995 – (0.025* 1000) = 970

By buying the new equipment it will create a savings in factory overhead cost over the next five years. The calculations of exhibit VI shows the net present value of the anticipated investment. This is “a way to compare the savings expected from one project with those of another. Makes it possible to choose among alternative uses for capital and plays an important role in divvying up the capital budget so that the company gets the highest return on those precious dollars” (Gable, 1992). The income taxes and depreciation of the possible investments has been left out of exhibit VI.

The company has an initial start-up or capital cost of approximately $7,000 which has been obtained

Capital Planning refers to the process of budgeting resources for the future of an organization 's long term plans. Capital planning includes budgeting for new or replacement machinery, research and development of new products, new plants and other major capital expenditures. Based on provided variables the Net Present Value (NPV) and Payback Periods will be calculated. A capital budget will be present whereas decisions can be made whether to accept or reject these projects. Projections will be made based on four-year time frame.

The second element, which we need to calculate for NPV of the project, is required rate of return of the Project E. It is known that Project E has the same risk profile as company’s portfolio. Hence, we can use portfolio’s beta and calculate the required rate of return of Project E with the help of Capital Asset Pricing Model (CAPM).