Unit 8 Assignment Financial Management - Compute the net present

Financial Management Unit VIII Assignment

This assignment will allow you to demonstrate the following objectives: 

Compute the net present value, profitability index, and internal rate of return for a given company.

Predict the best choice for a company based on analysis of financial data.

Compute a company’s WACC using given percentages. Calculate the cost of capital of a stock.

Computer the after-tax cost of capital for bonds.

Show all of your work for ALL problems.

1. The Turnip Company plans to issue preferred stock. Currently, the company’s stock sells for $220. Once new stock is issued, the Turnip Company would receive only $210. The dividend rate is 8%, and the par value of the stock is $200. Compute the cost of capital of the stock to your firm. Show all work.

2. The Maximus Corporation is considering a new investment, which would be financed from debt. Maximus could sell new $1,000 par value bonds at a new price of $979. The bonds would mature in 15 years, and the coupon interest rate is 8%. Compute the aftertax cost of capital to Maximus for bonds, assuming a 35% tax rate. Show all work.

3. Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%.

Initial investment Cash inflow Year 1 Project 1 $(465,000) $510,000 Project 2 $(700,000) $850,000 Compute the following for each project, showing all your work: • • •

NPV (net present value)

PI (profitability index)

IRR (internal rate of return)

Based on your analysis, answer the following questions :

a. Which project should be selected and why?

b. If the projects had the same IRR amounts but different NPV totals, then how would you know which project to select? Explain.

c. Suppose both projects had negative NPV totals, which project would you choose?

d. What do negative NPVs indicate? Explain.

e. Should the payback method be used to assist in project selection? Why or why not? Explain.

 4. The capital structure for Magellan Corporation is shown below. Currently, flotation costs are 5% of market value for a new bond issue and $3 per share for preferred stock. The dividends for common stock were $5 last year and have an estimated annual growth rate of 3.5%. Market prices are $950 for bonds, $25 for preferred stock, and $35 for common stock. Assume a 34% tax rate.

Financing Type Bonds (8%, $1k par, 15 year maturity) Common equity Preferred stock (5k shares outstanding, $50 par, $1.50 dividend) Total % % of Future Financing 35% 46% 19% 100%

Compute the company’s WACC. Is this WACC considered reasonable given the assumptions and other relevant information? Explain.