Reference no: EM132473078

Point 1: You are a new financial analyst at Belvedere Corp., a large manufactureing firm that is currently looking into diversification opportunities. The vice president of marketing is particularly interested in the venture that is only marginally connected with what the firm does now. Other Managers have suggested enterprises in more closely related fields. The proponents of the various ideas have all provided you with business forcasts from which you have developed financial projections, including project cash flows. You have also calculated the projects IRR with the following results:

Project                                  IRR                             Comments

A                                 19.67                          Marketings project, an almost totally new field

B                                  19.25                            Proposed by manufacturing, also different field

C                                   18.05                         Proposed by engineering, a familiar field

• You are now in a meeting with senior managers that was called to discuss the options. You have just presented your analysis, ending your talk with the preceding information. After your presentation the vice president of marketing stands, congradulates you on a fine job, and states the figures clearly show that project A is the best option. He also says that your financial analysis shows that project A has the full backing of the finance department. All eyes, including the CFO's turn to you. How do you respond.

Point 2. Harry and Flo Simone are planning to start a restaurant. Stoves, refridgerators, other kitchen equipment and furniture are expected to cost $50,000. Construction and other costs will be $30,000. The Simones expect the following revenue stream: in thousands

Year               1                2               3               4               5              6              7

Sales           $60          90          140         160         180         200        200

Food costs are expected to be 35% of revenues, while other variable expenses are forcast at 25% of revenues. Fixed overhead will be $40,000/year. All operating expenses will be paid in cash, revenues will be collected immediately, and inventory is negligible, so working capital need not be considered.

Problem 1: Develop a cash flow forecast for the Simones Restaurant

Point 3. Oxbow Inc. is contemplating a new venture project and has done a detailed five year cash flow estimate with the following result. in thousands. Cost of Capital is 12%

Co        C1         C2          C3          C4           C5

(257)  (65)        50      90        130           170

Problem 2: Compute the projects NPV and IRR and make a recommendation to management.

Question 1. Define the idea of capital structure and capital components. Why is capital structure important to the cost of capital concept? In many capital structure discussions, preferred stock is lumped in with either debt or equity. With respect to the cost of capital, however it's treated separately. Why?

Question 2. A number of projects are underway at your company. You?ve calculated the cost of capital based on market values and rates, and analyzed the projects using IRR and NPV Several projects are marginally acceptable. While watching the news last night, you learned that most economists predict a rise in interest rates over the next year. Should you modify your analysis in light of this information? Please explain

Question 3. The Aztec Corporation has the following capital components and costs. Calculate Aztecks WACC

Component                              Value               Cost

Debt                                   23,625                    12%

Preferred Stock                       4,350                 13.5

Common Equity                      52,275                    19.2Finance questions