Roman Manufacturing Company Making Great Shoes since 1933 To: Lorenzo Romano – CFO From: Stefano Romano – CEO Date: July 2, 2016 Re: Questions regarding ventures under consideration I have been thinking about the proposed acquisition of House of Napoli Shoes and the manufacturing equipment and ancillary items regarding the athletic shoes and casual footwear ventures. I have certain questions regarding financial matters of each project. I have listed the questions below and would like a detailed reply in one week in a memo and a follow-up meeting.
1. What is the net present value (NPV) for each venture? And based on the principle of mutually exclusivity, which venture(s) should be accepted or rejected?
2. What is the internal rate of return (IRR) for each venture? Given that the company’s cost of capital is 10%, which venture(s) should be accepted or rejected?
3. What are the Payback Periods for each venture? Which venture(s) should we accept given the company’s cutoff period of three (3) years?
4. By using the Capital Asset Pricing Model (CAPM), find the required return on equity for the purchase of House of Napoli Shoes.
5. Examine the proposed bond issue to be used in the acquisition of House of Napoli Shoes and find its cost of debt using the yield to maturity.
6. Given the weights of the equity portion (both preferred and common stock) and debt in the capital structure for the House of Napoli Shoes venture let me know what is Roman’s weighted average cost of capital involving the deal.
7. What do you think are the best financial decision rules that should be used in order to make a correct decision for the three possible ventures?
8. Are there any key questions that should be considered?
9. As CFO, which of the three ventures do you think Roman Manufacturing should pursue and why?