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Capital Budgeting

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Capital Budgeting

Category: Coursework

Subcategory: Finance

Level: College

Pages: 1

Words: 275

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Capital budgeting answers template
Question 8
Common stock
15 million shares
Market price = $ 24.63 per share
Dividend = $ 1.50
Growth rate = 7%
Cost of common stock, Ke= Do/Po + g
Where: Do is dividends per share (for the next year)
Po is current market value of stock
g is the growth rate
Ke = 1.50/24.63 * 100% + 7%
=6.09%+7%
=13.09%
Debt/Bonds
30 year, 9% annual and tax rate of 32%
Kd=Rd (1-t)
Where: Kd is cost of debt
Rd is interest rate of debt
T is tax rate
Kd = 9 (1-0.32)
=6.12%
Preferred stock
200,000 shares, 12%, trading at par that means it is trading at $ 100
Kp = Dps/Pnet * 100%
Where Kp is the cost of preferred stock
Dps is preferred dividends
Pnet is net issuing price
Dps = 12/100 * 100
= 0.12
Pnet = $ 100
Kp = 12/100 * 100
= 12%
WACC
Finance source Ke, Kd, Kps Weight Weight * Ke/Kd/Kps
Common stock 13.09% 0.4 5.236%
Preferred stock 12% 0.3 3.6%
Debt/Bond 6.12% 0.3 1.836%
WACC 10.672%
Question 9
Payback period
Project A
Year Cash flow Cumulative cash flow
0 (1,000) (1,000)
1 150 (850)
2 300 (550)
3 500 (50)
4 300 250
5 250 500
Payback period
= 3 + ($ 50 ÷ $ 300)
= 3 + 0.167
= 3.167 years
Project B
Year Cash flow Cumulative cash flow
0 (1,400) (1,400)
1 300 (1,100)
2 470 (630)
3 200 (430)
4 600 170
5 350 520
Payback period
= 3 + ($ 430 ÷ $ 600)
= 3 + 0.717
= 3.717 years
IRR
NPV= 0 =[ CF1/(1+R)^1 + CF2/(1+R)^2 + CF3/(1+R)^3 + CF4(1+R)…

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