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FIN360: finance case study

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FIN360

Fall 2020

Group Case Study

 

Please answer all questions. Do not leave any question unanswered. Show your calculations. Submit the Case Study through Moodle only.

Typed answers are preferred.

Assignment is due on  December, 1st 2020 at 11:59 PM

 

 

 

 

  1. The Rockies Corporation is considering a project that provides the following cash flows steam:
Year 0 1 2 3 4 5
Cash flows -$1,000 $375 $425 $250 $110 $100

 

  1. If WACC is 10%, what is NPV and should the company accept the project?

 

 

  1. Find IRR, MIRR, payback, and discounted payback period.

 

 

  1. Considering the following projects.
Project Year 0 1 2 3 4
A Cash flows -$100 $35 $35 $35 $35
B Cash flows -$100 $60 $50 $40 $30

 

Project A has WACC = 6.00% while project B has WACC = 8.50%.

 

  1. If these two projects are mutually exclusive, which project should the company accept based on the NPV, IRR, MIRR, payback, and discounted payback period for each project?

 

 

  1. Would your decision (Your answer from part A) change if these two projects were independent?

 

 

 

 

 

 

 

  1. The Big Easy Inc. target capital structure calls for 30% debt, 10% preferred stock, and 60% common equity. It has outstanding 25-year noncallable bonds with a face value of $1,000, a 9% semi-annual coupon, and a market price of $1,187.66. The tax rate is 40%. The company’s preferred stock currently trades at $65 and pays a $5 annual dividend per share. The company’s common stock, on the other hand, currently trades at $35 a share and just paid $4.56 annual dividend per share. The dividend is expected to grow at a constant rate of 3% a year. In addition, the risk-free rate is 6%, the average return on the market is 10%, and the firm’s beta is 1.5. Given the following information, answer the following questions:

 

  1. What is Big Easy’s before-tax cost of debt Rd and after-tax cost of debt Rd (1-T)?
  2. What is the company’s cost of preferred stock Rp?
  3. What is the company’s cost of common equity from retained earnings Rs using the three models: CAPM, DCF, and the own-bond-yield-plus-risk-premium? Assume the RP for the third method is 3%. State the Rs you will be using to calculate the WACC (the average).
  4. What is the company’s cost of common equity from new stock if the company would incur a 10% flotation cost from issuing new stocks?
  5. What is the flotation cost adjustment?
  6. What is the cost of external equity?
  7. Calculate the WACC if the common equity comes from retained earnings.
  8. Calculate the WACC if the common equity comes from new stocks.
  9. If the company is considering the following capital budgeting projects:

 

Project    Size      Rate of Return

A           $1M              13%

B           $2M              12.5%

C           $2M              12%

D           $2M              11.9%

E           $1M              11%

F           $1M              10.56%

G           $1M             10%

 

Which set of projects should be accepted?

 

 

 
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