Reference no: EM131146635
As a financial consultant, you have contracted with Wheel Industries to evaluate their procedures involving the evaluation of long term investment opportunities. You have agreed to provide a detailed report illustrating the use of several techniques for evaluating capital projects including the weighted average cost of capital to the firm, the anticipated cash flows for the projects, and the methods used for project selection. In addition, you have been asked to evaluate two projects, incorporating risk into the calculations.
You have also agreed to provide an 6-7 page report, in good form, with detailed explanation of your methodology, findings, and recommendations.
Company Information
Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year before tax and has additional annual costs of $600,000. The Marginal Tax rate is 35%.
Required:
A. Wheel has just paid a dividend of $2.50 per share. The dividends are expected to grow at a constant rate of six percent per year forever. If the stock is currently selling for $50 per share with a 10% flotation cost, what is the cost of new equity for the firm? What are the advantages and disadvantages of using this type of financing for the firm?
B. The firm is considering using debt in its capital structure. If the market rate of 5% is appropriate for debt of this kind, what is the after tax cost of debt for the company? What are the advantages and disadvantages of using this type of financing for the firm?
C. The firm has decided on a capital structure consisting of 30% debt and 70% new common stock. Calculate the WACC and explain how it is used in the capital budgeting process.
D. Calculate the after tax cash flows for the project for each year. Explain the methods used in your calculations.
E. If the discount rate were 6 percent calculate the NPV of the project. Is this an economically acceptable project to undertake? Why or why not?
F. Now calculate the IRR for the project. Is this an acceptable project? Why or why not? Is there a conflict between your answer to part C? Explain why or why not?
G. What is the expected value of each project's annual after tax cash flow? Justify your answers and identify any conflicts between the IRR and the NPV and explain why these conflicts may occur.
H. Assuming that the appropriate discount rate for projects of this risk level is 8%, what is the risk-adjusted NPV for each project? Which project, if either, should be selected? Justify your conclusion.
Write brief proposal comparing the different systems
: As the new HR director, you have decided to make the change to use one of these systems. Evaluate some of the systems available, choose three and write a brief proposal comparing the different systems, make a recommendation with reasons why, cost, an..
|
What were its average total assets
: Schiller Company has stockholders' equity of $400,000 and net income of $72,000. It has a payout ratio of 18% and a return on assets ratio of 20%.
|
Provide a brief interpretation of your results
: Staples, Inc. is one of the largest suppliers of office products in the United States. It had net income of $738.7 million and sales of $24,275.5 million in 2009.
|
Analyze the legal factors for the potential claim
: Based upon the scenario, does the employee have a legally viable claim for quid pro quo sexual harassment and/or hostile environment sexual harassment? What is the likely outcome? Analyze the legal factors for the potential claim(s) in the context..
|
What are the advantages and disadvantages of using this type
: Wheel has just paid a dividend of $2.50 per share. The dividends are expected to grow at a constant rate of six percent per year forever. If the stock is currently selling for $50 per share with a 10% flotation cost, what is the cost of new equity fo..
|
What conclusions concerning the management of the inventory
: Days in inventory. What conclusions concerning the management of the inventory can be drawn from these data?
|
Determine the frequency of the alternating current
: determine the frequency of the alternating current that induces a stress in the specimen that is twice the amount generated by the magnets.
|
How long must customer wait in line before being served
: An ice cream store has a single window for serving customers. Customers arrive at the rate of 10 per hour (Poisson distributed). The store can serve 15 customers per hour (Poisson distributed). What is the average number of customers waiting in line,..
|
How he would benefit from each stage of the process
: Assume you are the classification/intake officer. You want to ensure that Mr. Smith succeeds by creating a case plan that fits his needs. Evaluate one prison program that is currently implemented in your state that you think could benefit Mr. Smith..
|