Define the most important capital budgeting techniques. name at least two (2) capital budgeting techniques (e.g., NPV, IRR, Payback Period, etc.) that you used to arrive investment decision.

WACC Estimation

The following table gives the balance sheet for Travellers Inn Inc. (TII), a company that was formed by merging a number of regional motel chains.

The following facts also apply to TII:

1. Short-term debt consists of bank loans that currently cost 9%, with interest payable quarterly. These loans are used to finance receivables and inventories on a seasonal basis, so bank loans are zero in the off-season.
2. The long-term debt consists of 20-year, semiannual payment mortgage bonds with a coupon rate of 9%. Currently, these bonds provide a yield to investors of r_d = 12%. If new bonds were sold, they would have a 12% yield to maturity.
3. TII's perpetual preferred stock has a $100 par value, pays a quarterly dividend of $2.50, and has a yield to investors of 9%. New perpetual preferred stock would have to provide the same yield to investors, and the company would incur a 5% flotation cost to sell it.
4. The company has 4 million shares of common stock outstanding. P₀ = $20, but the stock has recently traded in price the range from $17 to $23. D₀ = $1 and EPS₀ = $2. ROE based on average equity was 24% in the most recent year, but management expects to increase this return on equity to 32%; however, security analysts and investors generally are not aware of management's optimism in this regard.
5. Betas, as reported by security analysts, range from 1.3 to 1.7; the T-bond rate is 9%; and RP_M is estimated by various brokerage houses to be in the range from 4.5% to 5.5%. Some brokerage house analysts reports forecasted dividend growth rates in the range of 10% to 15% over the foreseeable future.
6. TII's financial vice president recently polled some pension fund investment managers who hold TII's securities regarding what minimum rate of return on TII's common would make them willing to buy the common rather than TII bonds, given that the bonds yielded 12%. The responses suggested a risk premium over TII bonds of 4 to 6 percentage points.
7. TII is in the 30% federal-plus-state tax bracket.
8. TII's principal investment banker predicts a decline in interest rates, with r_d falling to 10% and the T-bond rate to 7%, although the bank acknowledges that an increase in the expected inflation rate could lead to an increase rather than a decrease in interest rates.

Assume that you were recently hired by TII as a financial analyst and that your boss, the treasurer, has asked you to estimate the company's WACC under the assumption that no new equity will be issued. Your cost of capital should be appropriate for use in evaluating projects that are in the same risk class as the assets TII now operates.

1. What are the market value weights for long-term debt, preferred stock, and common stock in Travellers' capital structure? Do not round intermediate calculations. Round your answers to two decimal places.

. You are given the following information for Watson Power Co. Assume the company’s tax rate is 40 percent. Debt: 8,000 6.2 percent coupon bonds outstanding, $1,000 par value, 10 years to maturity, selling for 110 percent of par; the bonds make semiannual payments. Common stock: 300,000 shares outstanding, selling for $50 per share; the beta is 1.08. Preferred stock: 12,000 shares of 7 percent preferred stock outstanding, currently selling for $70 per share. Market: 8 percent market risk premium and 4.2 percent risk-free rate. What is the company's WACC? Please do this step by step. Thank you!

Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank’s evaluation process, you have been asked to take an examination that covers several financial analysis techniques. The first section of the test addresses time value of money analysis. See how you would do by answering the following questions: Questions: (1) What is the future value of an initial $100 after three years if it is invested in an account paying 10% annual interest? (2) What is the present value of $100 to be received in three years if the appropriate interest rate is 10% per year? What is the difference between an ordinary annuity and an annuity due? What type of annuity is shown in the following cash flow time line? How would you change it to the other type of annuity? (1) What is the future value of a 3-year ordinary annuity of $100 if the appropriate interest rate is 10%? (2) What is the present value of the annuity? (3) What would the future and present values be if the annuity were an annuity due? (1) Define the stated, or quoted, or simple, rate, (rSIMPLE), annual percentage rate (APR), the periodic rate (rPER), and the effective annual rate (rEAR). (2) What is the effective annual rate for a simple rate of 10%, compounded semiannually? Compounded quarterly? Compounded daily? (1) Construct an amortization schedule for a $1,000 loan that has a 10%annual interest rate that is repaid in three equal installments.  

Multiple Choice

• yes; The NPV is $314,960.00

• yes; The NPV is $370,509.74

• no; The NPV is $272,189.10

• yes; The NPV is $244,189.10

• yes; The NPV is $97,042.85

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• No

• Yes

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Which one of the following is a correct statement concerning the excess return?

• The lower the average rate of return, the greater the excess return.

• The lower the volatility of returns, the greater the expected excess return.

• The excess return is not affected by the volatility of returns.

• The excess return is not correlated to the average rate of return.

• The greater the volatility of returns, the greater the expected excess return.

Give an example of how the principal-agent problem might prevent you from getting financing for something you want to do. Can you think of a way of overcoming this problem?

Holyrood Co. just paid a dividend of $1.55 per share. The company will increase its dividend by 24% next year and will then reduce its dividend growth rate by 6 percentage points per year until it reaches the industry average of 6% dividend growth, after which the company will keep a constant growth rate forever. If the required return on Holyrood stock is 16%, what will a share of stock sell for today? (Do not round intermediate calculations. Round the final answer to 2 decimal places.

Distinguish and explain the differences between business and financial risk and provide an example from a publicly traded company. Use specific examples and citations to support your assertion for business or financial risk.

How can a company utilize tools like NPV and IRR to optimize decisions about which projects to invest in? Why is this particularly important when cash flows are earned over many years, and especially when the cash flows are uneven? How can different degrees of risk among projects be factored into the decision? How so we optimize the value of our proposed capital investments if (a) there is a set maximum amount of capital dollars to be invested vs. (b) there is no theoretical maximum and potentially all projects which “make financial sense” could be funded?