CENGAGE MINDTAPAssignment: Chapter 09 Capital Budgeting TechniquesLocke Manufacturing Inc. is analyzing a project with the following projected cash flows:Year Cash Flow01234-$1,324,800300,000450,000546,000360,000This project exhibitsLocke's desired rate of return is 7.00%. Given the cash flows expected from the company's new project, compute the project's anticipated modifiedinternal rate of return (MIRR). (Hint: Round all dollar amounts to the nearest whole dollar, and your final MIRR value to two decimal places.)O 6.70%O 7.53%8.37%cash flows.O 9.21%Q Search this courseX CENGAGE MINDTAPAssignment: Chapter 09 Capital Budgeting TechniquesLocke Manufacturing Inc. is analyzing a project with the following projected cash flows:Year Cash Flow01234-$1,324,800300,000450,000546,000360,000This project exhibitsLocke's desired rate of return is 7.00%. Given the cash flows expected from the company's new project, compute the project's anticipated modifiedinternal rate of return (MIRR). (Hint: Round all dollar amounts to the nearest whole dollar, and your final MIRR value to two decimal places.)O 6.70%O 7.53%8.37%cash flows.O 9.21%Q Search this courseX

This project exhibits conventional cash flow.Conventional cash flow refers to a pattern of cash…

Answered: Assignment: Chapter 09 Capital…

EBK CFIN

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ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter9: Capital Budgeting Techniques

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WACC AND OPTIMAL CAPITAL BUDGET Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Kate of Return 1 2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.30 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of 5.00 per year at 50.00 per share. Also, its common stock currently sells for 38.00 per share; the next expected dividend, D1, is 4.25, and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? b. What is Adamson's WACC? c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?
WACC AND OPTIMAL CAPITAL BUDGET Adams Corporation is considering four average-risk protects with the following costs and rates of return: Project Cost Expected Rate of Return 1 2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can Issue debt at a rate of rd = 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of 500 per year at 4900 per share. Also, its common stock currently sells for 36.00 per share; the next expected dividend, D1 is 3.50; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? b. What is Adams WACC? c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adams accept?
OPTIMAL CAPITAL BUDGET Hampton Manufacturing estimates that its WACC is 125%. The company is considering the following seven investment projects: Project Size IRR A 750,000 14.0% B 1,250,000 13.5 C 1,250,000 13.2 D 1,250,000 13.0 E 750,000 12.7 F 750,000 12.3 G 750,000 12.2 a. Assume that each of these projects is independent and that each is just as risky as the firm's existing assets. Which set of projects should be accepted, and what is the firm's optimal capital budget? b. Now assume that Projects C and D are mutually exclusive. Project D has an NPV of 400,000, whereas Project C has an NPV of 350,000. Which set of projects should be accepted, and what is the firm's optimal capital budget? c. Ignore Part b and assume that each of the projects is independent but that management decides to incorporate project risk differentials. Management judges Projects B, C, D, and E to have average risk; Project A to have high risk; and Projects F and G to have low risk. The company adds 2% to the WACC of those projects that are significantly more risky than average, and it subtracts 2% from the WACC of those projects that are substantially less risky than average. Which set of projects should be accepted, and what is the firm's optimal capital budget?

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