IRR and Payback Period

You are the CFO for a marketing firm. An analyst who is evaluating projects presents two mutually exclusive project that will grow the firm's client base and revenues. Both projects capital requirements and project cash flows are presented below:

Project AProject B

YearCash FlowYearCash Flow

0 - 87,0000- 85,000

131,000115,000

237,000220.000

344,0003 90,000

Discount Rate. Project ADiscount Return, Project B

12 percent14 percent

A's Required payback periodB's Required payback period

2.5 years2.5 years

Calculate the NPV and Payback period for these projects. If the CIO requires NPV as the decision criteria which project should he/she accept?

Project A

Project B

Both Project A and B

Show calculations in making your recommendation.

If the CIO decides to use a payback criteria would he/she accept the same project as in the question above?YesNo

Show calculations to prove your recommendation?

Weighted Average Cost of Capital

Titan Mining Corporation has 14 million shares of common stock outstanding, 900,000 shares of 9 percent preferred stock outstanding and 210,000 ten percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.15, the preferred stock currently sells for $80 per share, and the bonds have 17 years to maturity and sell for 91 percent of par, and an after tax yield to maturity of 7.6%. The market risk premium is 11.5 percent, T-bills are yielding 7.5 percent, and the firm's tax rate is 32 percent. What is Titan Mining Corporation's Weighted average cost of capital.

Solve for the Market Value of each asset class.

MV_D =

MV_E =

MV_P =

Total Value of the Firm =

Solve for the percent in each asset class:

D/V =

E/V =

P/V =

Solve for the Return of

Equity, applying CAPM

Debt, given in the question

Preferred, formula for solving for R = D / r

What is the Weighted Average Cost of Capital (WACC) for Titan Mining Company