The cost of capital and the basics of capital budgeting: evaluating
The Cost of Capital And The Basics of Capital Budgeting: Evaluating Cash FlowsInstruction: Please submit your assignment as an attachmentto my Blackboard email by midnight on the due datePLEASE USE EXCEL TO SOLVE ALL PROBLEMSProblem 1You are employed by ABC Inc. Your boss has asked you to estimate the weighted average cost of capitalfor the company. Following are balance sheets and some information about CGT.AssetsCurrent assets $30,000,000Net plant, property, and equipment $100,000,000Total Assets $130,000,000Liabilities and EquityAccounts payable $10,000,000Accruals $10,000,000Current liabilities $20,000,000Long term debt (40,000 bonds, $1,000 face value) $40,000,000Total liabilities $60,000,000Preferred Stock (100,000 shares, $100 face value) $10,000,000Common Stock (10,000,000 shares) $30,000,000Retained Earnings $30,000,000Total shareholders equity $70,000,000Total liabilities and shareholders equity $130,000,000You check The Wall Street Journal and see that ABC stock is currently selling for $10.00 per share and thatABC bonds are selling for $1100.0 per bond. These bonds have a 7 percent coupon rate, with semi-annualpayments. The bonds mature in twelve years. The preferred stock has an unlimited life and pays an 5percent annual coupon. The preferred stock sells for $95. The beta for your company is approximatelyequal to 2. The yield on a 20-year Treasury bond is 4.0 percent. The expected return on the stock market is8.0 percent. ABC is in the 40 percent tax bracket.2. Davis Corporation is faced with two independent investment opportunities. Thecorporation has an investment policy which requires acceptable projects torecover all costs within 3 years. The cost of capital is 10 percent. The cash flowsfor the two projects are:Project A Project BYear Cash Flow Cash Flow0 -$120,000 -$90,0001 42,000 30,0002 43,000 30,0003 44,000 30,0004 45,000 30,0005 46,000 30,000Which investment project(s) does the company invest in using the:1)Payback period rule2)Discounted payback period rule3)NPV4)IRR3. XYZ Corporation is faced with two mutually exclusive investment opportunities.The cost of capital is 12 percent. The cash flows for the two projects are:Project A Project BYear Cash Flow Cash Flow0 -$140,000 -$100,0001 60,000 30,0002 60,000 30,0003 60,000 30,0004 30,0005 30,0006 30,000Which investment project should the company invest in using the:1.Equivalent annual annuity approach2.The replacement approachPlease name this file as:Assignment 6 first_name last_name.docIf you have any questions, feel free to contact me.
