Determine the payback period and internal rate of return

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Reference no: EM133286107

Financial Management

Question 1) Bombay Inc has 8.5 million shares of common stock outstanding, 250,000 shares of 5% preferred stock outstanding, and 135,000 7.5% semi-annual bonds outstanding, par value $1000 EACH. The common stock currently sells for $34 per share and has a beta of 1.25, the preferred stock currently sells for $91 per share, and the bonds have 15 years to maturity and sell for 114% of par. The market risk premium is 7.5%, T-bills are yielding 4%, and the company's tax rate is 35%.

a) Calculate the firm's market value capital structure.
b) Calculate the company WACC
c) If Bombay Inc generates a 7.5% with this capital, is Bombay Inc destroying or adding value discuss.

Question 2) Mr Blight the owner of Blight Oil exploration firm is evaluating a new Oil well in Calgary Alberta. The oil exploration engineer has just finished his analysis of the new Oil well. He has estimated that the Oil well will be productive for eight years, after which the well become dry. The Oil well will cost $450 million for exploration. The expected cashflow each year from the Oil well are shown below and Blight Oil exploration firm has a 12% required return on all its Oil well.

Year	Cash flow
0	-$450,000,000
1	63,000,000
2	85,000,000
3	120,000,000
4	145,000,000
5	175,000,000
6	120,000,000
7	95,000,000
8	75,000,000
9	-70,000,000

Required

a) Determine the payback period, internal rate of return and net present value. Based on your analysis should the company open the new Oil well?

b) Lets assume NPV is conceptually the best procedure for capital budgeting, why do you think that multiple measures are used in practice?

Reference no: EM133286107

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