1) Capital budgeting decisions are significant for profit generation. What are the DCF techniques used in capital budgeting decisions? What does each technique demonstrate and what are the advantages of using each technique? 2) Companies aim to maximize profits and capital rationing is a method to invest in projects serving the objective of profit maximization. How does a company ration its capital and how does capital rationing provide profit maximization? 3) Project A has an expected economic life of 5 years with an initial investment outlay of $250,000 at t=0 and expected cash flows of $72,000 per year. Project B has an expected economic life of 25 years with an initial investment outlay of $1,200,000 at t=0 and expected cash flows of $145,000 per year. A and B are mutually exclusive projects and your company has a cost of capital of 10%. Calculate the NPV and the IRR for the projects. Construct the NPV profiles and also find the cross-over rate for the projects. 4) Your company decides to invest in the Project B above, however for financing the investment the company will borrow half of the amount by a bond issue and the remaining amount by retaining earnings. The bonds will mature in 25 years, have an annual coupon rate of 8% with semi-annual payments and a face value of $1,000. The company will pay 5% flotation costs on the bond issue which are to be sold for $1000 to investors. The stock price of the company is $36 with a recent dividend of (DO was) $2,40/share and the constant growth rate of the firm is 3%. What is the WACC for the company for this project? 1) Capital budgeting decisions are significant for profit generation. What are the DCF techniques used in capital budgeting decisions? What does each technique demonstrate and what are the advantages of using each technique? 2) Companies aim to maximize profits and capital rationing is a method to invest in projects serving the objective of profit maximization. How does a company ration its capital and how does capital rationing provide profit maximization? 3) Project A has an expected economic life of 5 years with an initial investment outlay of $250,000 at t=0 and expected cash flows of $72,000 per year. Project B has an expected economic life of 25 years with an initial investment outlay of $1,200,000 at t=0 and expected cash flows of $145,000 per year. A and B are mutually exclusive projects and your company has a cost of capital of 10%. Calculate the NPV and the IRR for the projects. Construct the NPV profiles and also find the cross-over rate for the projects. 4) Your company decides to invest in the Project B above, however for financing the investment the company will borrow half of the amount by a bond issue and the remaining amount by retaining earnings. The bonds will mature in 25 years, have an annual coupon rate of 8% with semi-annual payments and a face value of $1,000. The company will pay 5% flotation costs on the bond issue which are to be sold for $1000 to investors. The stock price of the company is $36 with a recent dividend of (DO was) $2,40/share and the constant growth rate of the firm is 3%. What is the WACC for the company for this project
