Foerster, S. (2015). Financial Management. Welwyn Garden City: Pearson Education UK.
Topics Covered Include:
1. Weighted Average Cost of Capital
2. Valuation of Equity using the Capital Asset Pricing Model
3. Book Value of Debt
4. Capital Structure
5. Capital Budgeting Technique of Net Present Value
6. 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 pages (be sure to see paper requirements below for more expectations):
1. What is the cost of equity using the CAPM?
2. What is the cost of debt using Book Valuation?
3. What is the capital structure of the organization using book values?
4. What is the weighted Average Cost of Capital (WACC)?
5. What is the Net Present Value of the proposed Project?
6. Should the company purchase this project using your computed data? Explain.
7. What literature article supports Net Present Value over IRR or Payback?
1. Word limit: 5 pages.
2. The cover page and reference page/s are not included in the page requirement or word count. These should be in addition to page requirements.
3. Papers need to be formatted in proper APA 6th Edition style.
4. At least three outside peer-reviewed sources for your references.
5. Acceptable/credible sources include: Academic journals and books and industry journals. You could use credible business website sources in addition to the peer-reviewed required sources, but avoid Wikipedia and Google. These are academic papers that need to include scholarly research.
Do not Plagiarism, thank you!
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