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CAPITAL BUDGETING GROUP PRESENTATION ACMC 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 three mutually exclusive projects under consideration, and it might decide which project should receive the investment funds for this year. As part of the financial analysis team, it is up to you to determine the appropriate valuation of each project. However, before you can determine the appropriate valuations of these projects, you need to determine the weighted average cost of capital for the firm. Do remember that management has a preference in using the market values of the firms capital structure and believes its current structure is optimal. B

ALANCE SHEET Cash 2,000,000 Accounts Payable and Accruals 18,000,000 Accounts Receivable 28,000,000 Notes Payable 40,000,000 Inventories 42,000,000 Long-Term Debt 60,000,000 Preferred Stock 10,000,000 Net Fixed Assets 133,000,000 Common Equity 77,000,000 Total Assets 205,000,000 Total Claims 205,000,000 Market Values of Capital The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 10 percent semiannual coupon and are currently selling for $874.78. You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Any new issues of preferred stock would incur a $3.00 per share flotation cost. The company has 5 million shares of common stock outstanding with a current price of $14.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.80. New stock could be sold with flotation costs, including market pressure, of 15 percent. The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 14 percent. Your stocks beta is 1.22. Your firm does not use notes payable for long-term financing. Your firms federal + state marginal tax rate is 40%.

Project A: This project requires an initial investment of $20,000,000 in equipment which will cost an additional $3,000,000 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 raw goods inventory by $5,000,000, but it will also see an increase in accounts payable for $1,500,000. With this investment, the project will last 6 years at which time the market value for the equipment will be $1,000,000.