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Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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- Bellevue Bell Inc. is trying to determine if it is financially viable to purchase a new metal melting machine. The cost of this machine is $135,376, and it is expected to have yearly expected cash flows of $32,000. The machine has a useful life of 6 years. If Bellevue will only fund projects with a minimum internal rate of return of 12%, determine the internal rate of return on the machine and recommend if Bellevue should purchase it or not.Management of Crane Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $209,550 and will generate cash flows of $83,750 over each of the next six years. If the cost of capital is 11 percent, what is the MIRR on this project?Students at Harvard University are interested in developing a 6th generation 3D printer. The project has a two-year life with an initial investment of $160,000 to fund a year-long development phase. At the end of a year, a further $85,000 is required for production. Cash inflows from sales will occur at the end of the second year. The Project Manager of this additive manufacturing development team at the university is very aware of the uncertainty about the amount of cash inflows as it is unclear whether the market will embrace such a new innovative device. The management team believes there is a 70 percent probability that the new device will be a success. They also believe that the direction of device will become more apparent over the next year. In particular, there is an 80 percent chance that the direction over the next year will continue over the subsequent year. If the device is initially a success and this direction continues in the next year, the payoff will be $465,000. If…
- Mamafu is considering a proposal to manufacture high-protein cricket snacks. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $120,000, and thereafter the rent is expected to grow in line with inflation at 3% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.5 million. This could be depreciated for tax purposes over 10 years. However, Mamafu expects to terminate the project at the end of eight years and to resell the plant and equipment in year 8 for $500,000. Finally, the project requires an initial investment in working capital of $400,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of cricket snacks are expected to be $4 million, and thereafter sales are forecasted to grow by 4% a year, slightly faster than the inflation rate. Manufacturing costs are expected…ii) The directors of Komfwe’s Bibbentuckers are considering purchasing a new laundry machinery that would improve the quality and productivity of cleaning processing. The initial investment needed for the machinery is ZMW 120, 000. The cost of capital is 12% from Citizen Economic Empowerment Commission With a new machinery in place, the project is expected to generate the following cash flows, ZMW 20 000 in the first year, ZMW 30 000 in the second year, ZMW 40 000 in the third year, ZMW 50 000 in the fourth year, and ZMW 50 000 in the fifth year. • Calculate he Payback period for the project • Calculate the Net present value for the project • Advice if the project should be accepted under Net present value and payback period to Komfwe's Management board?Jamie Williams, the project manager of Arc Systems Ltd. is evaluating a proposal to install solarpanels on the roof of its factory. The panels will cost $150,000 per set. Depending on the price ofelectricity and the efficiency of the panels, the project will increase operating cash flows by either$50,000 per year or $75,000 per year. The useful life of the panels is 5 years. If early resultsindicate savings of $75,000 per year, four additional sets of panels will be installed immediatelyat the same cost with the same projected savings. The probability of either outcome is 50%. Usinga discount rate of 10%:Required:i. Compute the expected NPV of the project if the option to expand is NOT considered. ii. Compute the expected NPV of the project if the option to expand is considered. iii. Why is it important to consider real options in the capital budgeting process? GiveONE (1) specific example.
- LePew Cosmetics is evaluating a new fragrance-mixing machine. The machine requires an initial investment of $360000 and will generate cash inflows of $63450 per year for 8 years. If the cost of capital is 14%, calculate the net present value (NPV) and indicate whether to accept or reject the machine. The NPV of the project is $__________Chris is considering submitting a bit for the requested project, which involves building four houses per year for the next 3 years for a gated community. To complete such project, Chris would need to buy tools in the amount of $66,000, which would be completely depreciated over the project’s lifespan assuming straight-line depreciation, and such tools can be sold for $40,000 at the end of the project. Net working capital would be $16,000 over the life span of the project. The project’s variable cost would be $88,000 per house, and fixed cost would be $18,000 each year. The tax rate is 34% and Chris’ require rate of return is 14%. How much at minimum Chris should bid for each house? (Rounded to the nearest $500). A. $115,000 B. $98,500 C. $97,500 D. $96,500 E. $95,50This is an answer that Bartleby already answered. Can I get the calculations in Excel? Minicase In March 2020, the management team of Londonderry Air (LA) met to discuss a proposal to purchase five shorthaul aircraft at a total cost of $25 million. There was general enthusiasm for the investment and the new aircraft were expected to generate an annual cash flow of $4 million for 20 years. The focus of the meeting was on how to finance the purchase. LA had $20 million in cash and marketable securities (see table), but Ed Johnson the chief financial officer pointed out that the company needed at least $10 million in cash to meet normal outflow and as a contingency reserve. This meant that there would be a cash defficiency of $15 million, which the firm would need to cover either by the sale of common stock or by additional borrowing. while admitting that the arguments were finely balanced, mR. Johnson recommended an issue of stock. He pointed out that the airline industry was subject…
- Jefferson Products Inc. is considering purchasing a new automatic press brake, which costs $320,000 including installation and shipping. The machine is expected to generate net cash inflows of $90,000 per year for 12 years. At the end of 12 years, the book value of the machine will be $0, and it is anticipated that the machine will be sold for $110,000. If the press brake project is undertaken, Jefferson will have to increase its net working capital by $100,000. When the project is terminated in 12 years, there will no longer be a need for this incremental working capital, and it can be liquidated and made available to Jefferson for other uses. Jefferson requires a 9 percent annual return on this type of project and its marginal tax rate is 40 percent. Use Table II and Table IV to answer the questions. Calculate the press brake's net present value. Round your answer to the nearest dollar.$ Is the project acceptable? The project is . What is the meaning of the computed net…Spacevoyage Inc. is considering the installation of a new experimental laboratory which requires a key equipment costing $5,000,000. It is expected that the equipment will generate important experimental material worth $2,000,000 for each of the next 5 years. In the 6th year, the equipment will need an upgrade costing $2,500,000. Required return for this project is 15%. b) Should the new equipment be installed? Support your answer with relevant computation.Bullock Gold Mining is evaluating a new gold mine in South Dakota. All of the analysis has been done and the CFO has forecast some of the relevant cash flow information. If BGM opens the mine, it will cost $635 million today (Time 0) and it will have a cash outflow nine years from today (Time 9) of $45 million in costs related to closing the mine and reclaiming the area around. Of the initial costs, BGM will depreciate $500 million over 8 years using straight line method. Expected earnings before taxes for the eight years of operation are shown below. BGM has a required rate of return for all of its gold mines of 12%. Earnings before taxes (in $1,000s): 0 1 2 3 4 5 6 7 8 9 37,857.14 60,714.29 96,428.57 157,857.1 203,571.4 132,142.9 117,857.1 85,000.00 Find the relevant cash flows for each of the relevant periods (Time 0 – Time 9). Calculate the NPV, IRR and Payback Period for the cash flows and indicate whether BGM should…