Calculate xyz''s capital structure

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Reference no: EM13835544

1. XYZ Company has the following balances in its capital accounts as of 12/31/xx:

                                                Long Term Debt                                                60,000
Preferred Stock                                                21,000
Common Stock                                                 50,000
Paid in Excess                                    5,000
Retained Earnings                            15,000

XYZ's Long Term Debt is comprised of 25-year $1,000 face value bonds issued 8 years ago at a 7% coupon rate. The bonds are now selling to yield 10%. Their Preferred Stock is from a single issue of $100 par value, 6%. Preferred stock is now selling to yield investors 8%. XYZ has five thousand shares of common stock outstanding at a market price of $21.25.

a) Calculate XYZ's capital structure based on book values (Round to the nearest whole percentage)

b) Calculate XYZ's capital structure based on market values: (Round to the nearest whole percentage)

c) Assume XYZ's retained earnings is 10% and its tax rate is 45%, calculate its WACC using its Book Value based capital structure (ignoring flotation expenses).Round WACC to the nearest whole percentage.

d) Given the data above, calculate XYZ's WACC using its Market Value based capital structure.
Round WACC to the nearest whole percentage.

2. XYZ is contemplating a capital project - based on the following information:

            Cost of New Equipmentincluding installation and freight (assume 5 yr SL)                $150,000
Market Research, performed last year                                                                                       $50,000
Projected Units to be Sold (yrs 1-3)                                                                                                20,000
Projected Units to be Sold (yrs 4-5)                                                                                                25,000
Price Per Unit (yrs 1-3)                                                                                                                          $22.00
Price Per Unit (yrs 4-5)                                                                                                                          $25.00
Cost Ratio (yrs 1-5)                                                                                                                                 55.0%
Incremental cash expenses (yrs 1-5)                                                                                            125,000
Corporate Tax Rate                                                                                                                                     45%
Corporate Cost of Capital (answered #1 c [BV] or d[MV])                                                              %
                         (round % to the nearest 1%)

a. Calculate Initial Cash outlay

b. Develop the incremental cash flows Years 1-5

May use the attached worksheet- Write your answers above Based on the above information:

a. Calculate the Project's Payback Period

b. Calculate the Project's NPV

c. Calculate the Project's IRR(1% range, if necessary)

d. Calculate the Projects Profitability Index

May use the attached worksheet - write your answers above

3. XYZ's project information listed above is known as Project A. XYZ is comparing the above results against another project - with the following statistics for Project B:

        Initial Investment                                                                                           $250,000
Payback Period                                                                                               3.3 years
NPV                                                                                                                        $74,000
IRR 12%
Profitability Index                                                                                                 1.10x

a. Assume the above two projects are Mutually Exclusive. Based on your calculated results - which project would be most beneficial to proceed with?

b. Assume the above two projects are each Stand Alone - If XYZ has a Capital Budget of $550,000, and IRR guideline of 12% and a Payback Policy of 3 years - which project(s) best fits their policy/guidelines and should be funded given their capital budget?

Reference no: EM13835544

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