Instructions:
Using the company information provided below, complete the following two tabs in this MS Excel Workbook:
- Computation of the company's estimated cost of equity capital, rE, and weighted average cost of capital, rWACC
- NPV (capital budgeting) analysis of the company's proposed investment in a new Product B
The background paper, Capital Budgeting and the Cost of Capital, provides useful guidance for completing this assignment.
Based on the results of your NVP Analysis, summarize your recommendations to management regarding its contemplated introduction of the new product. Limit the length of your response to 75 words.
Company information:
North American Manufacturing Company is a U.S.-based publicly traded company, whose stock is listed on a national securities exchange.
Management looked up the stock's historical β (beta) at a popular financial Web search engine and obtained this additional information:
The balance sheet of the company as of its most recent fiscal year end reflects management's targeted capital structure for the company.
That balance sheet reports the following liability and shareholders' equity balances:
Note 1 - The vacant building is fully depreciated; no significant changes in the value of building over Product B investment period expected
As such, the projected net proceeds from the assumed end-of-investment disposal of the building is $1,200,000 [i.e., $2.0 million x (1 - 0.40)]
Instructions: Use the information in the first worksheet tab (Instructions and company/product information) to complete this tab. For each of a. through c., below, show all computations in good form and label properly all amounts presented.
a. Compute American Manufacuring Company's estimated cost of equity capital, rE
b. Compute the company's targeted capital structure (relative proportions of debt and common equity capital).
c. Compute the company's estimated weighted average cost of capital, rWACC
Attachment:- capital_budget_edwards.xls