- Victor Alexander owns Prospect Manufacturing, Inc. - Prospect is a C corporation, which is currently taxed at 21% for Federal taxes. - Prospect previously issued $1,000 par value corporate bonds that pays 6% annual interest. - The corporate bonds have 12 years until their maturity. - The current market price for the corporate bonds is $935. - Prospect previously issued $70 par value preferred stock that pays 9% annual dividends. - When the preferred stock was issued, it cost $2.50 per share to issue and sell. - The current market price for the common stock is $47 per share. - Prospect recently paid a dividend of $3.27 per share to the common stockholders. - Prospect has historically been increasing the dividends it pays by 7% annually. - The current capital structure of the business is 25% long-term debt, 15% preferred stock, and 60% common stock equity. - Victor is considering purchasing new equipment for Prospect's factory and has identified four mutually exclusive investment opportunities, which have the following estimated cash flows: Part 2 - Using Excel Formulas to Evaluate Investment Opportunities 1. For each project, calculate the net cash flows? 2. For each project, calculate the net present value? 3. For each project, calculate the internal rate of return? 4. Which project would you recommend be accepted? 5. Explain why you chose to accept the project you did. \begin{tabular}{|c|c|c|c|c|c|} \hline \multicolumn{2}{|c|}{ Before-Tax Cost of Long-Term Debt } & & & \multicolumn{2}{|c|}{ After-Tax Cost of Long-Term Debt } \\ \hline PV - Market Price of Bonds & 935.00 & & & Before-Tax Cost of Debt & 6.76% \\ \hline FV - Par Value of Bonds & 1,000.00 & & & Tax Rate & 21% \\ \hline Coupon Interest Rate & 7% & & & After-Tax Cost of Long-Term Debt & 5.34% \\ \hline PMT - Interest Payment & 60.00 & & & & \\ \hline N - Years Until Maturity & 12.00 & & & & \\ \hline RATE - Yield to Maturity & 6.76% & & & & \\ \hline & & & & & \\ \hline \multicolumn{2}{|c|}{ Cost of Preferred Stock } & & & \multicolumn{2}{|c|}{ Cost of Common Stock Equity } \\ \hline Par Value & 70.00 & & & Market Price Per Share & 47.00 \\ \hline Dividend Rate & 6.3% & & & Recently Paid Dividend & 3.27 \\ \hline Cost of Issuing and Selling Per Share & 2.50 & & & Dividend Growth Rate & 7% \\ \hline Net Proceeds From Sale & 67.50 & & & Next Year's Dividend & 3.50 \\ \hline Cost of Preferred Stock & 9.33% & & & Cost of Common Stock Equity & 14.45% \\ \hline & & & & & \\ \hline & & & & & \\ \hline & & & Weighted & & \\ \hline & Weight & Cost & Cost & & \\ \hline After-Tax Cost Long-Term Debt & 25% & 5.34% & 1.335% & & \\ \hline Cost of Preferred Stock & 15% & 9.33% & 1.40% & & \\ \hline Cost of Common Stock Equity & 60% & 14.45% & 8.67% & & \\ \hline Weighted Average Cost of Capital & & & 11.4045% & & \\ \hline \end{tabular}