Documentos de Académico
Documentos de Profesional
Documentos de Cultura
Introduction YouwillassumethatyoustillworkasafinancialanalystforAirJetBestParts,Inc.The companyisconsideringacapitalinvestmentinanewmachineandyouareinchargeofmakinga recommendationonthepurchasebasedon(1)agivenrateofreturnof15%(Task4)and(2)the firmscostofcapital(Task5). Task4.CapitalBudgetingforaNewMachine AfewmonthshavenowpassedandAirJetBestParts,Inc.isconsideringthepurchaseonanew machinethatwillincreasetheproductionofaspecialcomponentsignificantly.Theanticipated cashflowsfortheprojectareasfollows: Year1 Year2 Year3 Year4 $1,100,000 $1,450,000 $1,300,000 $950,000
15%
1. WhatistheprojectsIRR?(10pts)=22.38% 2. WhatistheprojectsNPV?(15pts)=$450,867.00
ComputationofNetPresentValue
Year 1 2 3 4
PresentFactor Present @15% Value 0.8696 $956,522. 0.7561 $1,096,408. 0.6575 $854,771. 0.5718 $543,166. Total= $3,450,867. Less:Initialcost= $(3,000,000) NPV= $450,867.00
Formula: CashFlow x
PresentFactor@ 15%=
Present Value
NPV=$450,867.00
3. Shouldthecompanyacceptthisprojectandwhy(orwhynot)?(5pts)Yes.
b. Opportunitycostcostthatareincurredwhengivingupanopportunityforfree.
c. ErosionCommonlyknownasdepreciation.Erosionoccurswhenthereissome
butwerecommendMorningstar.FindtheYTMofone15or20yearbondwith
5.50%x34%=1.87%5.50%=3.63%
c. Explainwhatothermethodsyoucouldhaveusedtofindthecostofdebtfor
AirJetBestPartsInc.(10pts)
returnfordebt.(5pts)
2. ComputethecostofcommonequityusingtheCAPMmodel.Forbeta,usetheaverage
Marketriskpremium,MRP Beta Competitors .65 DendreonCorp 1.40 DouglasEmmet 1.07 RaytheonCompany CommonStock AverageBeta 1.04
a. Whatisthecostofcommonequity?(5pts)
b. ExplaintheadvantagesanddisadvantagestousetheCAPMmodelasthemethod
tocomputethecostofcommonequity.Compareandcontrastthismethodwith thedividendgrowthmodelapproach.(10pts)
a. Whatisthecostofpreferredequity?(5pts)
Costofpreferredequityis$2.93dividedby$50.00=0.0586or5.86%
b. Isthereanyothermethodtocomputethiscost?Explain.(5pts)
4. Assumingthatthemarketvalueweightsofthesecapitalsourcesare30%bonds,60%
commonequityand10%preferredequity,whatistheweightedcostofcapitalofthe firm?(10pts) CapitalStructure Bond CommonEquity PreferredEquity WeightCostofCapital Weights 30% 60% 10% Cost 3.63% 7.16% 5.86% Weightsx Cost 1.09% 4.29% 0.59% 5.97%
5. ShouldthefirmusethisWACCforallprojects?Explainandprovideexamplesas
appropriate.(10pts)
YesthefirmshouldusetheWACCforallprojectsbecause;theabovecomputationisnot projectspecific.
6. Recomputethenetpresentvalueoftheprojectbasedonthecostofcapitalyoufound.Do
youstillbelievethatyourearlierrecommendationforacceptingorrejectingtheproject wasadequate?Whyorwhynot?(5pts) Year 1 2 3 4 Cashflow $1,100,000 $1,450,000 $1,300,000 $950,000 Presentfactor@ 5.97% Presentvalue $1,038,020 $1,291,201 $1,092,401 $753,313 $4,174,936 $(3,000,000) $1,174,936