Question 1

Almeda Shoes Co. is considering two alternative investment proposals.

• The first proposal calls for investment in plant and equipment to produce a new line of footwear.
• The second proposal calls for investment in plant and equipment to expand a current and successful line of footwear.

The company will choose one project or the other this year, but it will not invest in both.

Year	New Line	Expand Line
0	($18,000,000)	($12,000,000)
1	$5,600,000	$5,600,000
2	$5,600,000	$5,800,000
3	$5,600,000	$6,000,000
4	$5,600,000	$0
5	$5,600,000	$0

Use the information provided below to calculate Almeda Shoes weighted average cost of capital (WACC) to evaluate these two proposals. The following questions are asked to provide a guide for your analysis.

The WACC can be estimated based on Almeda Shoes long-term (capital) financing sources, including the use of proceeds from new issues of corporate bonds, preferred stock, and common stock. Issuance costs (flotation costs) for new issues are 2% for new issues of corporate bonds, 4% for new issues of preferred stock, and 20% for new issue of common stock.

Almeda Shoes target capital structure is 20% debt, 15% preferred stock, and 65% equity.

Almeda Shoes marginal tax rate is 28.

Corporate Bonds

Almeda Shoes can sell 9.5 % coupon, 20- year bonds (coupons are paid semi-annually) for $934.84. The Par Value is $1,000. Almeda Shoes can issue an unlimited amount of new bonds at the same rate.

Preferred Stock

Almeda Shoes preferred stock sells for $85.80 per share, the dividend rate is 7%, and the par value of this preferred stock is $100.

Common Stock

Almeda Shoes' common stock sells for $22.43 per share, the growth rate is 5%, and Almeda Shoes just paid a dividend for last year in the amount of $1.56 (D₀ = $1.56).

Answer the following questions:

1. What is Almeda Shoes after-tax cost of a new issue of debt?
2. What is Almeda Shoes cost of a new issue of preferred stock?
3. What is Almeda Shoes cost of common stock [using the Dividend Discount Model]
4. What is Almeda Shoes weighted average cost of capital (WACC)?
5. Calculate the net present value (NPV) of each project and based on this criterion for which project would you recommend acceptance (use WACC₁ as the discount rate)?

Notes: show all the necessary steps, formulas, and calculations. LESS MARK will be given if you failed to show the steps/formulas/calculations, although you may solve using financial calculator.

Question 2

Ali Redha Co. needs $270,000,000 for new investment projects. The company has a target capital structure (D/E) of (5/4). Other related data are listed in the table below:

Net Income	$ 140,000,000
Common shares outstanding (Shares)	10,000,000
The Ex-dividend Date	15th of January 2020
The market share price on 10th of January 2020	$ 18
The market share price on 14th of January 2020	$ 20

Consider the residual dividend policy to answer the below questions:

1. What is the amount of dividend paid?
2. What is the DPS (Dividends Per Share)?
3. What is the dividend Pay-out ratio?
4. What was the market share price on 15^th of January?
5. You bought 10,000 shares of Ali Redha Co. on 10^th of January. Few days later, you sold the shares on 15^th of January, calculate the amount and the rate of profit (or loss) of your investment?

Under the Residual Dividend Policy, If the company had only $ 100,000,000 Net Income, explain how Ali Reda company will fund the new investment projects (what are the source of funds). Note that all other given data are not changed.