Q.1 The Perkins Company has employed you to analyze a capital project. It has given you the following information: Bond Coupon Rate Price Quote Maturity Number of Bonds Outstanding 1 6.75 955 22 35,000 2 7.25 1100 20 45,000 The bonds make semiannual interest payments and the marginal tax rate is 40 percent. Perkins expects the next dividend (Di) to be $0.45 and its common stock is currently selling for $5.625 per share. The expected growth rate in earnings and dividends is a constant 5%. Perkins has a beta of 1.3, the risk-free rate is 3 percent, and the expected market return is 12.5 percent. Perkins has 25,000,000 shares of common stock outstanding To complete the analysis, the NPV and IRR need to be calculated for the project. The initial investment is $22.2 million. The net cash flows are $6 million for years one through four and $8 million for year five. Should Perkins accept this project? Q.2.A company finances its operations with 40 percent debt and 60 percent equity. Its net income is I = $16 million and it has a dividend payout ratio of x = 25%. Its capital budget is B = $15 million this year. The annual yield on the company's debt is za= 10% and the company's tax rate is T= 30%. The company's common stock trades at Po = $55 per share, and its current dividend of Do = $5 per share is expected to grow at a constant rate of g= 10% a year. The flotation cost of external equity, if it is issued. is F = 5% of the dollar amount issued. What is the company's WACC? Now the company is planning to expand its operations. The managing director has proposed two investments alternative Project X and Y. Below are the cash flows for two mutually exclusive projects. year CFx CFY 0 (5 m) (5 m) 1 2.085m 0 2 2.085m 0 3 2.085m 0 4 2.085m 9.677m On the basis of MIRR evaluate which project is more feasible? Q.1 The Perkins Company has employed you to analyze a capital project. It has given you the following information: Bond Coupon Rate Price Quote Maturity Number of Bonds Outstanding 1 6.75 955 22 35,000 2 7.25 1100 20 45,000 The bonds make semiannual interest payments and the marginal tax rate is 40 percent. Perkins expects the next dividend (Di) to be $0.45 and its common stock is currently selling for $5.625 per share. The expected growth rate in earnings and dividends is a constant 5%. Perkins has a beta of 1.3, the risk-free rate is 3 percent, and the expected market return is 12.5 percent. Perkins has 25,000,000 shares of common stock outstanding To complete the analysis, the NPV and IRR need to be calculated for the project. The initial investment is $22.2 million. The net cash flows are $6 million for years one through four and $8 million for year five. Should Perkins accept this project? Q.2.A company finances its operations with 40 percent debt and 60 percent equity. Its net income is I = $16 million and it has a dividend payout ratio of x = 25%. Its capital budget is B = $15 million this year. The annual yield on the company's debt is za= 10% and the company's tax rate is T= 30%. The company's common stock trades at Po = $55 per share, and its current dividend of Do = $5 per share is expected to grow at a constant rate of g= 10% a year. The flotation cost of external equity, if it is issued. is F = 5% of the dollar amount issued. What is the company's WACC? Now the company is planning to expand its operations. The managing director has proposed two investments alternative Project X and Y. Below are the cash flows for two mutually exclusive projects. year CFx CFY 0 (5 m) (5 m) 1 2.085m 0 2 2.085m 0 3 2.085m 0 4 2.085m 9.677m On the basis of MIRR evaluate which project is more feasible