The campbell company is a manufacturetheir capital

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Reference no: EM13347777

The Campbell Company is a manufacture.

Their capital structure consists of

Long-Term debt, with an incremental borrowing rate of

Capital stock, with the following information:

Risk free rate 6%

Market rate of return 13%

Beta 1.2

Long-Term debt 40% of total financing

Capital Stock 60% of total financing

The company's tax rate is 40%

Required:

Using CAMP, compute the cost of equity financing

Compute the Weighted Average Cost of Capital

Analyze the following 4 independent projects:

Use NPV

IRR

Payback

To determine if the project should be accepted or rejected

IGNORE: Terminal cash flows & Working Capital Requirements.(use 7 year depreciation table)

Use 7 year depreciation table (tax-depreciation)

Project 1

Purchase of capital equipment for expansion

Capital expenditure 1,000,000

Useful life 8 years

Pre-tax Cash flows (not including depreciation)

Year Revenues Costs

1 250,000 100,000

2 262,500 105,000

3 275,625 110,250

4 289,406 115,763

5 303,877 121,551

6 319,070 127,628

7 335,024 134,010

8 351,775 140,710

2,387,277 954,911

Project 2

Purchase of capital equipment for expansion

Capital expenditure 500,000

Useful life 8 years

Pre-tax Cash flows (not including depreciation)

Year Revenues Costs

1 250,000 100,000

2 262,500 105,000

3 275,625 110,250

4 289,406 115,763

5 303,877 121,551

6 319,070 127,628

7 335,024 134,010

8 351,775 140,710

2,387,277 954,911

Project 3

Purchase of capital equipment for replacement

Capital expenditure 1,000,000

Useful life 8 years

Pre-tax Cash flows (not including depreciation)

Year Revenues Costs

1 200,000 -

2 210,000 -

3 220,500 -

4 231,525 -

5 243,101 -

6 255,256 -

7 268,019 -

8 281,420 -

1,909,822 -

Project 4

Purchase of capital equipment for replacement

Capital expenditure 700,000

Useful life 8 years

Pre-tax Cash flows (not including depreciation)

Year Revenues Costs

1 - (200,000)

2 - (200,000)

3 - (200,000)

4 - (200,000)

5 - (200,000)

6 - (200,000)

7 - (200,000)

8 - (200,000)

- (1,600,000)

*Assume 200,000 is positive cash flow

Reference no: EM13347777

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