a companies balance sheet has 3 components on the

Question

A companies balance sheet has 3 components on the right side. Based on the information below, determine the firms WACC

a. there is $1,000,000 of preferred stock, purchased at a price of $90; the preferred stock pays an 8% annual dividend and has a face value of $100/share

b. there is $2,000,000 ofcommon stock equity; while the par value is $1/share, the shares were actually purchased recently for $2/share and shareholders expect them to pay $.50/share dividend next year and that the dividends will grow 4%/yr

[hint: first determine expected return of common shareholders]

c. there is $1,000,000, $1000 face value, 5% semi-annual coupon 30 year bonds. The bonds just sold for $900 and will mature in 20 years. [determine the bonds YTM first]

d. determine WACC using the WACC formula after first determining the % of total market value than each of the 3 components above represent. The corporate tax rate is 35%

Part II [completely separate from part I.

Instructions: Read through the capital budgeting scenarios provide below. Then review, analyze, and write a report, that covers:

1. Make a determination about the economic viability of the proposal, using THREE capital budgeting methods: NPV, IRR, and simple payback methods.
2. Also identify at least 3 risks attendant with your chosen proposed investment idea.
3. Based on the CFO's own criteria, should the project be approved?

For the scenario, assume spending occurs on day 1 of each year and benefit or annual savings occurs on day 365.Also assume the discount rate or WACC for all examples is 10%. Ignore taxes and depreciation.

Also assume the cfo has set a max of 2 years for approval using the simple payback method, and 17% hurdle rate when using the IRR method

Scenario : Invest inNew Labor Saving Equipment

A company is considering buying a new labor saving piece of equipment.Using 3 capital budgeting methods, make a determination about the economic viability of the proposal using the following information:

• Labor content is 12% of sales, which are $10 million annually.
• The new equipment will save 20% of labor each year.
• The new equipment will last 5 years and will be sold as scrap for $10,000.
• The new equipment will cost $200,000.

Here is the PowerPoint Instructions.

1.the PowerPoint should be in color, with eye-catching graphics
2. slides should NOT be covered with words
3. presentation should take 20 minutes; not 10, not 30 or more
4. slides must be as follows at a minimum
a. cover page
b. calculations of part 1 WACC 1-2 slides
c. slide showing simply payback
d. slide showing NPV
e. slide showing IRR
f. slide showing 3 risks of the particular project
g. slide showing whether cfo should/should not project be approved based on CFO's criteria