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Mandatory Question IV. Mr. Chad, a fecent SU COD graduate, were roomely himd to wotk for Allind Campany, a repplier of auto nopuir parts used in the after-market with ptoducts from Daimlet, Oiryslot. Font and other aotomaliers. He is in tharge of capital budgeting and was asked to cooduct the following capital twolgeting. Mrs. Linda 5mith, his boss and dief selling new stocks for the proposed propocts. She also expianod that Alsed has a farly gool rating from the Moody's and would end up with a coupon poy mert of 580 arnually per 51.00 face salbe Then, he abket her twack abonit Allied's heta, She pousol and added. "Weil it depends and vanies all the time. Oddly enought. Allied's beta hase't dhanged mach over the rreent yeart and is has been around 1.1. The went on to say, "the current finandal markits are cat of line and that is market riak promium nam about 12 hh which I have nover sont during my teruare here. On the contrary, the interest rate on risk frec aswes is merely 25\%-" Findily, she west buck to her rioe chan offioe. Mr. Chad locked into the memo that she lett betind on the nwo poipects. time so build up the market for thins product, so the canti inflows woud ingvise over time. Fropect M involves an add-on to an evisting line, and it cash flows woald decreac ever time Both propocts have 3ywar lives, because Allied is planning to introduce entisoly new models after 3 yours Here are the pmifects' net roch flows (in million dollars): Depreciation, salvage values, net working capital reyuigenenbs, and trs effects are all incloded in these cash flows The curnent tak rate for Allied is 19%. The CFO also male subjective ribk assessenents of each propect, and she concluded that hoth propets have disconet rates that ane identical to the firm's sont of capital of 5200 million dotlars. A. 30 points) If yeu were in charge of Allied y capial budgeting, which propoct(s) would you reovermend? Explain why. B. (10 points) What could be your recommendation, if the company were to raise only $100 by a stock issuance of $50 million and a bond isedance of $50 mitlicn? Jostify your mownancedabion, Mandatory Question IV. Mr. Chad, a fecent SU COD graduate, were roomely himd to wotk for Allind Campany, a repplier of auto nopuir parts used in the after-market with ptoducts from Daimlet, Oiryslot. Font and other aotomaliers. He is in tharge of capital budgeting and was asked to cooduct the following capital twolgeting. Mrs. Linda 5mith, his boss and dief selling new stocks for the proposed propocts. She also expianod that Alsed has a farly gool rating from the Moody's and would end up with a coupon poy mert of 580 arnually per 51.00 face salbe Then, he abket her twack abonit Allied's heta, She pousol and added. "Weil it depends and vanies all the time. Oddly enought. Allied's beta hase't dhanged mach over the rreent yeart and is has been around 1.1. The went on to say, "the current finandal markits are cat of line and that is market riak promium nam about 12 hh which I have nover sont during my teruare here. On the contrary, the interest rate on risk frec aswes is merely 25\%-" Findily, she west buck to her rioe chan offioe. Mr. Chad locked into the memo that she lett betind on the nwo poipects. time so build up the market for thins product, so the canti inflows woud ingvise over time. Fropect M involves an add-on to an evisting line, and it cash flows woald decreac ever time Both propocts have 3ywar lives, because Allied is planning to introduce entisoly new models after 3 yours Here are the pmifects' net roch flows (in million dollars): Depreciation, salvage values, net working capital reyuigenenbs, and trs effects are all incloded in these cash flows The curnent tak rate for Allied is 19%. The CFO also male subjective ribk assessenents of each propect, and she concluded that hoth propets have disconet rates that ane identical to the firm's sont of capital of 5200 million dotlars. A. 30 points) If yeu were in charge of Allied y capial budgeting, which propoct(s) would you reovermend? Explain why. B. (10 points) What could be your recommendation, if the company were to raise only $100 by a stock issuance of $50 million and a bond isedance of $50 mitlicn? Jostify your mownancedabion
