Question

In: Finance

"Answer all the parts in one answer" Company B has three Projects it can choose from:...

"Answer all the parts in one answer"

Company B has three Projects it can choose from: Projects X, Y and Z. The following information is available regarding Project X:

Years 0 1 2 3
CF -100 80 60 40

The company’s capital structure is distributed equally between debt and preferred stock and the remaining 40% goes to common stock. It has also the following information:

1- After tax cost of debt: 3%. Tax rate: 40%
2- Preferred stocks are selling at $70 per share and pay a dividend of $7 per share
3- Common stocks are selling at $60 per share, pay a year-end dividend of $4 per share and grow at a constant rate of 8.59%.

The company is also considering another two projects “Y” & “Z” with the following information:

Criteria Project Y Project Z
NPV $40 $67
MIRR 11% 20%
IRR -2.0% 18.7%
Regular Payback 2.23 years 1.77 years


5) Assuming that the three projects X, Y & Z are independent, which project (s) should the company choose: *


a) Project Z


b) Projects X and Z


c) Projects X, Y and Z


d) Projects Y and Z


e) Reject all projects


6) Assuming that the three projects X, Y & Z are mutually exclusive, which project (s) should the company choose: *


a) Project Z


b) Project X


c) Projects X, Y and Z


d) Project Y


e) Reject all projects


7) Assuming that the three projects X, Y & Z are independent, based on MIRR criteria which project (s) should the company choose: *


a) Project Z


b) Project X


c) Projects X, Y and Z


d) Project Y


e) Reject all projects


8) Assuming that the three projects X, Y & Z are mutually exclusive, based on MIRR criteria which project (s) should the company choose: *


a) Project Z


b) Project X


c) Projects X, Y and Z


d) Project Y


e) Reject all projects


9) If IRR for Project X is 17.95%, and the three project X, Y & Z are independent, then based on IRR criteria which project (s) should the company choose: *


a) Project Z


b) Projects X and Z


c) Projects X, Y and Z


d) Projects Y and Z


e) Reject all projects


Solutions

Expert Solution

Solution:

First calculating the cost of capital of the company.

Cost of Debt (post tax) = 3.0%

Cost of preferred stock = 7/70 = 10%

Cost of equity:

Given D1 = $4 (assuming); P0 = 60, g =  8.59%

Implied cost of equity = 4/60 + 8.59% = 15.26%

The WACC is computed in table below:

So, WACC of the Company is 10.0%

Computing NPV, IRR, MIRR and Payback using excel.

We have them as under:

NPV = 52.36
MIRR = 27%
IRR = 42%
Payback = 1.33 years

Comparing the Projects:

Now answering the questions:

5) Assuming that the three projects X, Y & Z are independent, which project (s) should the company choose:

A: All three projects have NPV greater than zero and MIRR greater than cost of capital and reasonable payback period. All three can be done. (Neagtive IRR may be due to non-conventional cash flows)

6) Assuming that the three projects X, Y & Z are mutually exclusive, which project (s) should the company choose:

A: Project X, NPV is +ve and has highest MIRR, IRR and lowest payback

7) Assuming that the three projects X, Y & Z are independent, based on MIRR criteria which project (s) should the company choose:

A: All three.

8) Assuming that the three projects X, Y & Z are mutually exclusive, based on MIRR criteria which project (s) should the company choose:

A: Project X

9) If IRR for Project X is 17.95%, and the three project X, Y & Z are independent, then based on IRR criteria which project (s) should the company choose:

A: Project Z, Higher IRR, Lower backback

-x-


Related Solutions

Company B has three Projects it can choose from: Projects X, Y and Z. The following...
Company B has three Projects it can choose from: Projects X, Y and Z. The following information is available regarding Project X: Years 0 1 2 3 CF -100 80 60 40 The company’s capital structure is distributed equally between debt and preferred stock and the remaining 40% goes to common stock. It has also the following information: 1- After tax cost of debt: 3%. Tax rate: 40% 2- Preferred stocks are selling at $70 per share and pay a...
Company B has three Projects it can choose from: Projects X, Y and Z. The following...
Company B has three Projects it can choose from: Projects X, Y and Z. The following information is available regarding Project X: Years 0 1 2 3 CF -100 80 60 40 The company’s capital structure is distributed equally between debt and preferred stock and the remaining 40% goes to common stock. It has also the following information: 1- After tax cost of debt: 3%. Tax rate: 40% 2- Preferred stocks are selling at $70 per share and pay a...
Company B has three Projects it can choose from: Projects X, Y and Z. The following...
Company B has three Projects it can choose from: Projects X, Y and Z. The following information is available regarding Project X: Years 0 1 2 3 CF -100 80 60 40 The company’s capital structure is distributed equally between debt and preferred stock and the remaining 40% goes to common stock. It has also the following information: 1- After tax cost of debt: 3%. Tax rate: 40% 2- Preferred stocks are selling at $70 per share and pay a...
Company B’s WACC is 10%. It has three Projects it can choose from: Projects X, Y...
Company B’s WACC is 10%. It has three Projects it can choose from: Projects X, Y and Z. The following information is available regarding Project X. Years 0 1 2 3 Project X cash flows -$100 80 60 40 And the following information is available regarding Projects Y and Z. Criteria Project Y Project Z NPV $40 $67 MIRR 10% 20% IRR 2.0% 18.7% Regular Payback 2.23 years 1.77 years 5) Assuming the three projects X, Y & Z are...
ompany B’s WACC is 10%. It has three Projects it can choose from: Projects X, Y...
ompany B’s WACC is 10%. It has three Projects it can choose from: Projects X, Y and Z. The following information is available regarding Project X. Years 0 1 2 3 Project X cash flows -$100 80 60 40 And the following information is available regarding Projects Y and Z. Criteria Project Y Project Z NPV $40 $67 MIRR 10% 20% IRR 2.0% 18.7% Regular Payback 2.23 years 1.77 years 9) If IRR for Project X is 17.95%, and the...
This assignment has three parts that should all be completed on one document. For this assignment...
This assignment has three parts that should all be completed on one document. For this assignment you will explore the cost-effectiveness of informatics interventions in healthcare. In your role as director of health informatics you are tasked with putting together an executive report that outlines and EHR adoption the effectiveness of EHR. The detailed assignment requirements are below. Part I Summary of laws and mandates requiring EHR adoption EHR & treatment effectiveness and efficiency Be sure to discuss how PHR...
Please answer all three parts to question 1. 1A. The income from operations and the amount...
Please answer all three parts to question 1. 1A. The income from operations and the amount of invested assets in each division of Beck Industries are as follows: Income from Operations Invested Assets Retail Division $167,200 $760,000 Commercial Division 74,000 370,000 Internet Division 69,700 410,000 a. Compute the return on investment for each division. (Round to the nearest whole number.) Division Percent Retail Division   % Commercial Division   % Internet Division   % b. Which division is the most profitable per dollar...
Choose one best answer from the following. Which of the following can apply for an injunction...
Choose one best answer from the following. Which of the following can apply for an injunction under s 1324 to restrain a company from paying a dividend: Group of answer choicesAny creditor Any shareholder shareholders where the dividend payment will not be fair and reasonable to them, creditors where the dividend payment will materially prejudice the company’s ability to pay them ASIC, shareholders where the dividend payment will not be fair and reasonable to them, creditors where the dividend payment...
Please answer all the parts of this question Please answer all the parts of this question...
Please answer all the parts of this question Please answer all the parts of this question Question: a) Where is the flow accelerating in the control volume? b) Will the pressure be greater or less than hydrostatic in a region of accelerating flow? c) Is the hydrostatic estimate of force on the gate; larger, smaller, or the same, as that obtained from the Momentum Equation? Explain. d) Where does the change in flow momentum go in this control volume? Explain.
A game show has three doors for a contestant to choose from. Behind one of the...
A game show has three doors for a contestant to choose from. Behind one of the doors is a brand new car, and behind the other two doors are a goat. The contestant randomly picks a door (⅓ probability of each). The host opens one of the other two doors and reveals a goat. The host then gives the contestant the option of keeping their original door, or switching to the other unopened door. If the contestant switches, what is...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT