Reference no: EM133077775
FNAN 300 Principles of Business Finance - American University of Ras Al Khaimah
Purpose of the assignment
The purpose of this assignment is to assess students' understanding in the use of cost of capital and capital budgeting techniques in long-term project analysis.This assignment is an individual work and aims to assess the students' conceptual and computing skills.
Question 1
Foodco Company has reported the following financial data on its recent financial report. The company is planning to restructure its capital structure by increasing its debt from 30% to 40% of the total capital of the company. The proposed capital structure is composed of 40% debt and 60% equity. The company is planning to issue a 1000 face-value, 15-year bond outstanding with a 7% annual coupon rate that is currently trading at its par value. The new debt issue will increase the before tax cost of debt to 8%. The company applies a marginal tax rate of 30%. In addition, the report shows that the risk free rate is 5%, the market risk premium is 6% and its common stock has a beta of 1.4.
Required
(a) Compute the weighted average cost of capital of the company?
(b) Suppose that the weighted average cost of capital for the company was 9.5%. Discuss whether the company should proceed with the restructuring of its capital structure?
(c) The company is planning to use the new debt to finance a new capital project with an IRR of 10%. Discuss whether the company should proceed with the new project?
Question 2
The following information is related to Arabian Food manufacturing companyas of 31st December 2020
• The company has 50 million common stock shares worth of 400 million dirhams.
• The company's stocks are currently trading at 20 dirhams per share.
• The company recently paid 3 dirhams per share and expected to grow at 5% annually.
• The company has issued preference shares for a value of 50 million dirhams consisting of 5 million preference shares and the annual dividend per share is 10 dirhams per share.
• The last traded price of a preference share was 125 dirhams per share.
• The average cost of debt for the company's long-term debts worth of 150 million dirhams is 12% per annum.
• The company's marginal tax rate is 30%.
Required?
(a) Calculate the costs of each sources of capital.
(b) What is the weighted average cost of capital of the company?
Question 3
Planet Company is evaluating a capital project with the following characteristics:
• The initial capital outlay is 500,000 dirhams.
• Annual after-tax operating cash flows are 90,000.
• Project life is 10 years.
• The project beta is 1.20.
• The risk-free rate is 4% percent and the expected market return is 10%.
• The cost of capital is 13%
Required?
(a) Compute the project's NPV.
(b) Compute the project's IRR.
(c) Based on the NPV and IRR results, discuss whether the project should be accepted?
Question 4
Al Shams Capital group is planning to invest its 1.1 million dirhams in one or more of the following projects. Suppose that the average cost of capital is 10%. The proposed initial investment and expected net cash flows for each alternative projects are provided as follows:
|
Projects
|
Initial Investment
|
Year
|
Net cash flows
|
|
Project A
|
650,000 dirhams
|
1
|
250,000
|
|
|
|
2
|
165,000
|
|
|
|
3
|
150,000
|
|
|
|
4
|
120,000
|
|
|
|
5
|
90,000
|
|
|
|
|
|
|
Project B
|
850,000 dirhams
|
1
|
250,000
|
|
|
|
2
|
210,000
|
|
|
|
3
|
210,000
|
|
|
|
4
|
190,000
|
|
|
|
5
|
160,000
|
|
|
|
|
|
|
Project C
|
420,000 dirhams
|
1
|
100,000
|
|
|
|
2
|
190,000
|
|
|
|
3
|
80,000
|
|
|
|
4
|
120,000
|
|
|
|
5
|
90,000
|
Required?
(a) Compute the payback period for each project.
(b) Compute the net present value of the projects.
(c) Calculate the Profitability index of the projects.
(d) Rank the projects based on their payback, NPV and profitability index results.
(e) Discuss and interpret the results.
Attachment:- Principles of Business Finance.rar