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Provide your answers and show your work. 3. XYZ Co has two mutually exclusive investments X and Y. Investment X has an initial capital outlay
Provide your answers and show your work. 3. XYZ Co has two mutually exclusive investments X and Y. Investment X has an initial capital outlay of $100 million, and the investment is expected to generate $64 million in one year, $45 million in two years and $30 million in three years. Investment Y has an initial capital outlay of $120 million, and the investment is expected to generate $70 million in one year, $55 million in two years and $40 million in three years. a. Use the information from Question 1 and Question 2, determine the market value of debt (both Bond A and Bond B), market value of equity, and the capital structure of XYZ Co (% of debt capital and % of equity capital). b. Use the information from Question 1 and Question 2, determine XYZ's after tax cost of debt (for both Bond A and Bond B), cost of equity and weighted average cost of capital, assuming XYZ's tax rate is 20%. c. Determine the internal rate of return and net present value of Investment X, Investment Y and Marginal Investment (Y-X). Which investment should be chosen? Explain. (Note: If you do not know how to find the weighted average cost of capital, just use 10% as the cost of capital.)
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