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Compute the cost of equity financing
Course:- Financial Management
Reference No.:- EM13290




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The Campbell Company is a manufacture.

Their capital structure consists of

  1. Long-Term debt, with an incremental borrowing rate of 8%
  2. Capital stock, with the following information:

Risk free rate                              6%

Market rate of return               13%

Beta                                         1.2

Long-Term debt                                  40% of total financing

Capital Stock                                      60% of total financing

The company's tax rate is                               40%

Required:

Using CAMP, compute the cost of equity financing. Compute the Weighted Average Cost of Capital

Analyze the following 4 independent projects:

Use                  NPV

                        IRR

                        Payback   

To determine if the project should be accepted or rejected

Project 1

Purchase of capital equipment for expansion

Capital expenditure                             1,000,000

Useful life 8 years

Pre-tax Cash flows (not including depreciation)

Year                            Revenues                                 Costs

1                                  250,000                                   100,000

2                                  262,500                                   105,000

3                                  275,625                                   110,250

4                                  289,406                                   115,763

5                                  303,877                                   121,551

6                                  319,070                                   127,628

7                                  335,024                                   134,010

8                                  351,775                                   140,710

                                    2,387,277                                954,911

 

Project 2

Purchase of capital equipment for expansion

Capital expenditure                             500,000

Useful life 8 years

Pre-tax Cash flows (not including depreciation)

Year                            Revenues                                 Costs

1                                  250,000                                   100,000

2                                  262,500                                   105,000

3                                  275,625                                   110,250

4                                  289,406                                   115,763

5                                  303,877                                   121,551

6                                  319,070                                   127,628

7                                  335,024                                   134,010

8                                  351,775                                   140,710

                                    2,387,277                                954,911

Project 3

Purchase of capital equipment for replacement

Capital expenditure                             1,000,000

Useful life 8 years

Pre-tax Cash flows (not including depreciation)

Year                            Revenues                                 Costs

1                                  200,000                                   -

2                                  210,000                                   -

3                                  220,500                                   -

4                                  231,525                                   -

5                                  243,101                                   -

6                                  255,256                                   -

7                                  268,019                                   -

8                                  281,420                                   -

                                    1,909,822                                -

 

Project 4

Purchase of capital equipment for replacement

Capital expenditure                             700,000

Useful life 8 years

Pre-tax Cash flows (not including depreciation)

Year                            Revenues                                 Costs

1                                  -                                          (200,000)

2                                  -                                          (200,000)

3                                  -                                          (200,000)

4                                  -                                          (200,000)

5                                  -                                          (200,000)

6                                  -                                          (200,000)

7                                  -                                          (200,000)

8                                  -                                          (200,000)

                                    -                                         (1,600,000)

*Assume 200,000 is positive cash flow




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