CAPITAL BUDGETING CASE STUDY ANALYSIS ACME Inc. is a multinational conglomerate corporation providing a wide range of goods and services to its customers. As part of its budgeting process for the next year, it has several projects under consideration so it must decide which projects should receive capital budgeting investment funds for this year. As part of the financial analysis department, you have been given several projects to evaluate. However, before you can determine the appropriate valuations of these projects, you need to determine the weighted average cost of capital for the firm since it is used as a threshold of acceptability for projects. Remember that management has a preference in using the market values of the firms capital structure and believes it current structure (target weight/market weight) is optimal.

Market Values of Capital

1. The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 10 percent semi-annual coupon, and are currently selling for $874.78.

2. You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00.

3. The company has 5 million shares of common stock outstanding with a currently price of $17.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.65.

4. The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 13 percent. Your stocks beta is 1.22. 5. Your firm only uses bonds for long-term financing.

6. Your firms federal + state marginal tax rate is 40%. (Ignore any carryforward implications)

Modified Accelerated Cost Recovery System (MACRS) ownership 5 year investment class Depreciation Schedule

1	20%
2	32%
3	19%
4	12%
5	11%
6	6%

Total = 100%

C: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $50,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $120,000. The project will last 6 years at which time the market value for the equipment will be $200,000.

The project will project a product with a sales price of $30.00 per unit and the variable cost per unit will be $10.00. The fixed costs would be $100,000 per year. Because this project is very close to current products sold by the business, management wants you to apply the WACC as the discount rate to the project .

years	2014	2015	2016	2017	2018	2019
forecast unit sold	30,000	40,000	50,000	60,000	70,000	80,000

CAPITAL BUDGETING CASE STUDY ANALYSIS Project D: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $200,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $125,000. The project will last 6 years at which time the market value for the equipment will be $20,000.

The project will project a product with a sales price of $25.00 per unit and the variable cost per unit will be $12.00. The fixed costs would be $350,000 per year. Because this project is not similar to current products sold by the business, management wants to impose a 3 percentage point premium on its current WACC as the valuation hurdle it must meet or surpass.

years	2014	2015	2016	2017	2018	2019
forecast unit sold	70,000	100,000	65,000	70,000	65,000	55,000