Berry Industries is evaluating four projects for potentialinclusion in their 2016 capital budget. The table below containsthe cash flows expected for each project. Complete the table forthe various capital budgeting methods indicated.Additional information:The companyAc€?cs current financial structure is considered to beoptimalBerry is in the 40% marginal tax bracketBerry currently has 25 million shares of common stockoutstanding selling for $50 per share. The most recent dividend thestock paid was $3.00, and analysts predict that the company willgrow at a constant rate of 9.5% in the future.When estimating the cost of equity using the bond yield plusrisk premium approach Berry subjectively adds 7% to the yield tomaturity on its existing debt.The following data is relevant for estimating the cost of equityusing the Capital Asset Pricing Model (CAPM) rf = 3.5%, Equity risk premium = 10%, BerryAc€?cs beta =1.4To estimate the cost of equity, Berry places more weight on theDividend Discount Model. Consequently, they estimate the cost ofequity capital using the following weights:ComponentWeightDividend Discount Model50%Capital Asset Pricing Model30%Bond Yield plus Risk Premium20% There are 7,500,000 shares of Berry preferred stock on themarket that pays an annual dividend of $7.50 per share. Thepreferred shares currently sell for $55 each. New Preferred stockwill incur a $2.00 per share flotation cost.Berry has $500,000,000 of outstanding debt (book value). Thenon-callable debt has an 8% coupon rate, pays annual couponpayments, matures in 15 years and is currently priced at 93.4percent of par value.Berry expects to earn $150,000,000 in net income in the comingyear and has a 40% dividend payout ratio.Relevant information for the projects under consideration are inthe table below. All cash flows are end of the year cash flows.TIMEPROJECT APROJECT BPROJECT CPROJECT DInitial Cost$25,000,000$37,500,000$28,500,000$30,500,000Project Life57310After Tax Cash Flows$7,500,000$9,000,000$12,500,000$6,000,000Complete the table for the capital budgeting methods indicatedand select which projects Berry should pursuePaybackIRRNPVMIRRSelect Y/NProjects A and B are Mutually exclusive from each other,but independent from projects C and D which are mutually exclusivefrom each other.Which project(s) should Berry undertake? Why?

Payback Period: It is a method used in capital budgeting to determine the period in which the…

Answered: Which project(s) should Berry…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 11P

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Berry Industries is evaluating four projects for potential inclusion in their 2016 capital budget. The table below contains the cash flows expected for each project. Complete the table for the various capital budgeting methods indicated.

Additional information:

The companyAc€?cs current financial structure is considered to be optimal

Berry is in the 40% marginal tax bracket

Berry currently has 25 million shares of common stock outstanding selling for $50 per share. The most recent dividend the stock paid was $3.00, and analysts predict that the company will grow at a constant rate of 9.5% in the future.

When estimating the cost of equity using the bond yield plus risk premium approach Berry subjectively adds 7% to the yield to maturity on its existing debt.

The following data is relevant for estimating the cost of equity using the Capital Asset Pricing Model (CAPM)

r_f = 3.5%, Equity risk premium = 10%, BerryAc€?cs beta = 1.4

To estimate the cost of equity, Berry places more weight on the Dividend Discount Model. Consequently, they estimate the cost of equity capital using the following weights:

Component	Weight
Dividend Discount Model	50%
Capital Asset Pricing Model	30%
Bond Yield plus Risk Premium	20%

There are 7,500,000 shares of Berry preferred stock on the market that pays an annual dividend of $7.50 per share. The preferred shares currently sell for $55 each. New Preferred stock will incur a $2.00 per share flotation cost.

Berry has $500,000,000 of outstanding debt (book value). The non-callable debt has an 8% coupon rate, pays annual coupon payments, matures in 15 years and is currently priced at 93.4 percent of par value.

Berry expects to earn $150,000,000 in net income in the coming year and has a 40% dividend payout ratio.

Relevant information for the projects under consideration are in the table below. All cash flows are end of the year cash flows.

TIME	PROJECT A	PROJECT B	PROJECT C	PROJECT D
Initial Cost	$25,000,000	$37,500,000	$28,500,000	$30,500,000
Project Life	5	7	3	10
After Tax Cash Flows	$7,500,000	$9,000,000	$12,500,000	$6,000,000
Complete the table for the capital budgeting methods indicated and select which projects Berry should pursue
Payback
IRR
NPV
MIRR
Select Y/N

Projects A and B are Mutually exclusive from each other, but independent from projects C and D which are mutually exclusive from each other.

Which project(s) should Berry undertake? Why?

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