I need Help with section 3 and for section 1 and 2 to be looked over. I need help filling in the blanks left on the excel spreadsheet.

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Capital Budgeting Assignment Part 1

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 andbelieves 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 13percent. 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)

Depreciation Schedule

Modified Accelerated Cost Recovery System (MACRS)

Ownership Year	5-Year Investment Class Depreciation Schedule
1	20%
2	32%
3	19%
4	12%
5	11%
6	6%
	Total = 100%

Section 1 (10% of total grade)

Find the costs of the individual capital components:

1. long-term debt (before tax and after tax)

Before Tax:

=(50+((1000-874.78)/15))/((1000+874.78)/2)

=0.062245 or 6.2245%

After tax:

= 6.2245 * (1- Tax rate)

= 6.2245 * ( 0.6)

= 3.7347%

2. preferred stock

=Dividend / Price of preferred stock

= (9% of par value) / 90

=9/90

=.1 or 10%

3. average cost of retained earnings (avg. of Capital Asset Pricing Model & Gordon Growth Model/Constant Growth Model)

By CAPM = Risk free rate + (Beta * (MArket risk premium - Risk free rate))

= 6 + (1.22 * (13-6)

=14.54%

By Gordan growth model = (D0 * (1+ growth rate of divident)) / price of stock

=.65 (1+0.1) / 17

=0.0421

Avg of CAPM and gordan gowth

=(14.54 + 4.2) / 2

=18.74/ 2

= 9.37%

Section 2 (10% of total grade)

Determine the target percentages for the optimal capital structure, and then compute the WACC. Carry weights to a minimum of four decimal places, but rounding in calculations is not necessary. (i.e. 0.2973 or 29.73%)

Long term debt = 60000 * 874.78 = 52,486,800

Preferred stock = 100000 * 90 = 9,000,000

Equity = 5,000,000 * 17 = 85,000,000

Total value of firm = 52,486,800 + 9,000,000 + 85,000,000 = 146,486,800

Weight of Debt = 52,480,800 / 146,486,800 = 0.3583

Weight of preferred stock= 9,000,000 / 146,486,800 = 0.06143

Weight of Equity = 85,000,000 / 146,486,800 = 0.5803 or 58.03%

WACC = Wd*Kd(1-T)+We*Ke+Wp*Kp

=0.3583*7.08%+0.5803*14.37%+.0614*10%

=11.49%

Section 3, Part 1 (30% of total grade)

Select one (1) of the projects assignment and create a valuation spreadsheet for the project provided by your instructor. You should use your Use the spreadsheet template provided to structure your valuation analysis. Evaluate each project according to the following valuation methods:

1. Net Present Value of Discounted Cash Flow (use WACC number for discount rate)
2. Internal Rate of Return
3. Payback Period

Profitability Index (use WACC number for discount rate)

Project L:

This project requires an initial investment of $2,000,000 in equipment which will cost an additional $75,000 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 $100,000. The project will last 6 years at which time the market value for the equipment will be $180,000.

The project will project a product with a sales price of $32.00 per unit and the variable cost per unit will be $11.00. The fixed costs would be $110,000 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
Forecasted Units Sold	32,000	45,000	48,000	58,000	75,000	90,000

Initial Project Scenario Inflation Rate Tax Rate 32.00 40% Price $ 11.00 Variable Cost 75,000 45,000 48,000 32,000 58,000 90,000 Units sold 6.0% Depreciation Rate Required Return Salvage Value Initial Cost Installation Cost 11.0% 20.0% 32.0% 19.0% 12.0% $ 180,000 $ 2,000,000 75,000 100,000 110,000 $ $ Increase in NWC Fixed Cost $ 1 2 3 5 0 $1,536,000 $528,000 110,000 $ $1,024,000 $352,000 110,000 $ $1,440,000 $495,000 110,000 $ $1,856,000 $638,000 $2,400,000 $825,000 $2,880,000 $990,000 Sales Variable Cost Fixed Cost 110,000 $ $1,108,000 $249,000 110,000 110,000 $ $898,000 $562,000 $835,000 $664,000 $1,465,000 $1,780,000 EBITDA $415,000 $394,250 $228,250 $1,236,750 $124,500 Depreciation $147,000 $171,000 $503,750 $859,000 $1,655,500 BIT | Expense Net Income $201,500 $343,600 $58,800 $68,400 $494,700 $662,200 $88,200 $102,600 $302,250 $515,400 $742,050 $993,300 Operating Cash Flow Non-operating Cash Flow Net Working Capital Year 0 $503,200 $766,600 $696,500 $764,400 $970,300 $1,397,800 Year 2 Year 1 Year 3 Year 4 Year 6 Year 5 Year 0 Internal Rate of Return Net Present Value 4.00 ayback Period Profitability Index Initial Project Scenario Inflation Rate Tax Rate 32.00 40% Price $ 11.00 Variable Cost 75,000 45,000 48,000 32,000 58,000 90,000 Units sold 6.0% Depreciation Rate Required Return Salvage Value Initial Cost Installation Cost 11.0% 20.0% 32.0% 19.0% 12.0% $ 180,000 $ 2,000,000 75,000 100,000 110,000 $ $ Increase in NWC Fixed Cost $ 1 2 3 5 0 $1,536,000 $528,000 110,000 $ $1,024,000 $352,000 110,000 $ $1,440,000 $495,000 110,000 $ $1,856,000 $638,000 $2,400,000 $825,000 $2,880,000 $990,000 Sales Variable Cost Fixed Cost 110,000 $ $1,108,000 $249,000 110,000 110,000 $ $898,000 $562,000 $835,000 $664,000 $1,465,000 $1,780,000 EBITDA $415,000 $394,250 $228,250 $1,236,750 $124,500 Depreciation $147,000 $171,000 $503,750 $859,000 $1,655,500 BIT | Expense Net Income $201,500 $343,600 $58,800 $68,400 $494,700 $662,200 $88,200 $102,600 $302,250 $515,400 $742,050 $993,300 Operating Cash Flow Non-operating Cash Flow Net Working Capital Year 0 $503,200 $766,600 $696,500 $764,400 $970,300 $1,397,800 Year 2 Year 1 Year 3 Year 4 Year 6 Year 5 Year 0 Internal Rate of Return Net Present Value 4.00 ayback Period Profitability Index