BCO222-BCN13141 Business Finance II Task brief & rubrics Task The exercise contains two parts. Please read both cases and answer the questions at the end of each case. It is an individual work. Please demonstrate your answers with the formulas used and each step followed. A final number without explanation and details of calculation is not considered a correct answer even if it is correct. You can use excel or word to submit the task. 1) Axelon Corporation is a worldwide leader in oil and gas production which is based in Venezuela. The company has grown really fast during the last 10 years. The company's operations in Caracas have been so significant that it needs to construct a natural gas acting and processing center at an estimated cost of 570 million Axelo has 20 millions of retained earnings that can be used to finance a proportion of the expensive and plans to sell a bond issue to raise the remaining 550 million. The decision to use so much debt financing for the project was largely due to the argument by company CEO John Peterse St.) that debt financing is relatively cheap relative to common stock (which the firm has used in the past) Company CFO Bob Wilmen did not object to the decision to use all debt but pondered the issue of what cost of capital to use for the expansion project There is no doubt but that the out-of-pocket cost of financing was equal to the new interest that must be paid on the debe. However, the CFO also know that by using debt for this project the firm would eventually have to use equity in the future if it wanted to maintain the balance of debt and equity it had in its capital structure and not become overly dependent on borrowed funds The following balance sheet reflects the mix of capital sources that Axcion has used in the past. Although the percentages would vary over time, the fimm tended to manage its capital structure back toward these proportions Source of Financing Target Capital structure Weights Bonds 40% Common Stocks 60% The firm currently has one issue of bonds outstanding. The bonds have a par value of $1,000 per boed, carry on 8 percent coupon rate of interest, have 16 years to maturity, and are selling for $1,035 Arcelon's common soek has a current market price of $3S and the firm paid a $2.50 dividend last year that is expected to increase at an annual rate of 6 percent for the foreseeable future, a) If the flotation cost is $30 per bond and the tax rate is 34% yield to maturity is 7,61%, what is the cost of new debt financing based on current market prices after taxes? (You can use the rate formula in excel to find b) What is the investor's required rate of return for Axelo's common stock? c) lr Axeles were to sell new shares of common stock, it would incur a cost of $2.00 por share. What is your estimate of the cost of new equity financing raised from the sale of common stock? d) Complete the WACC for Axeloa investment using the weights reflected in the actual financing mix which is $20 million in retained emings and S50 million in boods e) Compute the WACC for Axelo where the firm maintains its target capital structure by reducing its debe offering to 40 percent of the 570 million in new capital, or 52% million sing $20 million in retained earnings and raising $22 million through a new equity offering English (United States Soul If you were the CFO for the company, would you prefer to use the calculation of the cost of capital in pant (d) or (e) to evaluate the new project! Why? 2) You are asked to evaluate two capital-budgeting proposals. You have been asked not only to provide a recommendation but also to respond to a number of questions aimed at assessing your understanding of the capital-budgeting process. This is a standard procedure for all new financial ralysts at Axelo. and it will serve to determine whether you are moved directly into the capital-bugeting analyse department or are provided with remedial training Provide an evaluation of two proposed projects, both with S-year expected lives and identical initial outlays of $110,000. Both of these projects involve additions to exclon's highly successful product line, and as a result, the required rate of return on both projects has been established at 12 percent. The expected free cash Bows from each project are as follows: Project A Project Cash Flow Year 20000 0.00 Cash Flow Year? 30000 40000 Cash Flow Year 3 000 40000 Cash Flow Year 450000 400.00 Cash Flow Year S 0000 Initial Investment 110000 -110000 In evaluating these projects, please respond to the following questions: a) Why is the capital-budgeting process so important? b) Why is it difficult to find exceptionally profitable pros? c) What is the payback period on each project? If Axeon imposes a 3-year maximum seceptablo payback period, which of these projects should be accepted d) What the criticisms of the payback period .) Determine the NPV for each of these projects. Should they be scepted? Describe the logic behind the NPV I Determine the Pl for each of the projects. Should they be accepted h) Would you expect the NPV and P1 methods to give consistent accepe rejet decisions? Why or why not? What would happens to the NPV and M for each project if the required rate of return increased? If the required rate of return decid? Determine the IRR for each project. Should hy be accepted? How does a change is the required rate of return affect the project's male of rotum 1) What revestment rate assumptions are implicitly made by the NPV and TRR methods Which one is better? . Word count: NA Font: Arial 12,5 pts Text alignment. Justified. The intext References and the Bibliography have to be in Harvard citation style Son Week (2) - Moodle Turnitin 1 Dec 2020-23:59 1307 Eng united States Font BCO222-BCN13141 Business Finance II Task brief & rubrics Task The exercise contains two parts. Please read both cases and answer the questions at the end of each case. It is an individual work. Please demonstrate your answers with the formulas used and each step followed. A final number without explanation and details of calculation is not considered a correct answer even if it is correct. You can use excel or word to submit the task. 1) Axelon Corporation is a worldwide leader in oil and gas production which is based in Venezuela. The company has grown really fast during the last 10 years. The company's operations in Caracas have been so significant that it needs to construct a natural gas acting and processing center at an estimated cost of 570 million Axelo has 20 millions of retained earnings that can be used to finance a proportion of the expensive and plans to sell a bond issue to raise the remaining 550 million. The decision to use so much debt financing for the project was largely due to the argument by company CEO John Peterse St.) that debt financing is relatively cheap relative to common stock (which the firm has used in the past) Company CFO Bob Wilmen did not object to the decision to use all debt but pondered the issue of what cost of capital to use for the expansion project There is no doubt but that the out-of-pocket cost of financing was equal to the new interest that must be paid on the debe. However, the CFO also know that by using debt for this project the firm would eventually have to use equity in the future if it wanted to maintain the balance of debt and equity it had in its capital structure and not become overly dependent on borrowed funds The following balance sheet reflects the mix of capital sources that Axcion has used in the past. Although the percentages would vary over time, the fimm tended to manage its capital structure back toward these proportions Source of Financing Target Capital structure Weights Bonds 40% Common Stocks 60% The firm currently has one issue of bonds outstanding. The bonds have a par value of $1,000 per boed, carry on 8 percent coupon rate of interest, have 16 years to maturity, and are selling for $1,035 Arcelon's common soek has a current market price of $3S and the firm paid a $2.50 dividend last year that is expected to increase at an annual rate of 6 percent for the foreseeable future, a) If the flotation cost is $30 per bond and the tax rate is 34% yield to maturity is 7,61%, what is the cost of new debt financing based on current market prices after taxes? (You can use the rate formula in excel to find b) What is the investor's required rate of return for Axelo's common stock? c) lr Axeles were to sell new shares of common stock, it would incur a cost of $2.00 por share. What is your estimate of the cost of new equity financing raised from the sale of common stock? d) Complete the WACC for Axeloa investment using the weights reflected in the actual financing mix which is $20 million in retained emings and S50 million in boods e) Compute the WACC for Axelo where the firm maintains its target capital structure by reducing its debe offering to 40 percent of the 570 million in new capital, or 52% million sing $20 million in retained earnings and raising $22 million through a new equity offering English (United States Soul If you were the CFO for the company, would you prefer to use the calculation of the cost of capital in pant (d) or (e) to evaluate the new project! Why? 2) You are asked to evaluate two capital-budgeting proposals. You have been asked not only to provide a recommendation but also to respond to a number of questions aimed at assessing your understanding of the capital-budgeting process. This is a standard procedure for all new financial ralysts at Axelo. and it will serve to determine whether you are moved directly into the capital-bugeting analyse department or are provided with remedial training Provide an evaluation of two proposed projects, both with S-year expected lives and identical initial outlays of $110,000. Both of these projects involve additions to exclon's highly successful product line, and as a result, the required rate of return on both projects has been established at 12 percent. The expected free cash Bows from each project are as follows: Project A Project Cash Flow Year 20000 0.00 Cash Flow Year? 30000 40000 Cash Flow Year 3 000 40000 Cash Flow Year 450000 400.00 Cash Flow Year S 0000 Initial Investment 110000 -110000 In evaluating these projects, please respond to the following questions: a) Why is the capital-budgeting process so important? b) Why is it difficult to find exceptionally profitable pros? c) What is the payback period on each project? If Axeon imposes a 3-year maximum seceptablo payback period, which of these projects should be accepted d) What the criticisms of the payback period .) Determine the NPV for each of these projects. Should they be scepted? Describe the logic behind the NPV I Determine the Pl for each of the projects. Should they be accepted h) Would you expect the NPV and P1 methods to give consistent accepe rejet decisions? Why or why not? What would happens to the NPV and M for each project if the required rate of return increased? If the required rate of return decid? Determine the IRR for each project. Should hy be accepted? How does a change is the required rate of return affect the project's male of rotum 1) What revestment rate assumptions are implicitly made by the NPV and TRR methods Which one is better? . Word count: NA Font: Arial 12,5 pts Text alignment. Justified. The intext References and the Bibliography have to be in Harvard citation style Son Week (2) - Moodle Turnitin 1 Dec 2020-23:59 1307 Eng united States Font