This is an application of capital budgeting that integrates the projection of a basic cash flow and the computation and analysis of six capital budgeting tools.Your company is thinking about acquiring another corporation. You have two choices; the cost of each choice is $250,000. You cannot spend more than that, so acquiring both corporations is not an option. The following are your critical data:Corporation A:Revenues = 100K in year one, increasing by 10% each year.Expenses = 20K in year one, increasing by 15% each year.Depreciation Expense = 5K each year.Tax Rate = 25%Discount Rate = 10%Corporation B:Revenues = 150K in year one, increasing by 8% each year.Expenses = 60K in year one, increasing by 10% each year.Depreciation Expense = 10K each year.Tax Rate = 25%Discount Rate = 11%You must compute and analyze items (a) through (h) using a Microsoft Excel spreadsheet. Make sure that all calculations can be seen in the background of the applicable spreadsheet cells. In other words, leave an audit trail so that others can see how you arrived at your calculations and analysis. Items (i), (j), and (k) should be submitted in Microsoft Word.a. A 5-year projected income statementb. A 5-year projected cash flowc. Net Present Valued. Internal Rate of Returne. Payback Periodf. Profitability Indexg. Discounted Payback Periodh. Based on items (a) through (g), which company would you recommend acquiring?i. In a 1,050-1,500-word memo, define, analyze, and interpret the answers to items (c) through (g). Present the rationale behind each item and why it supports your decision stated in item (h). Also, attempt to describe the relationship between NPV and IRR. (Hint: The key factor here is the discount rate used.) In this memo, explain how you would analyze projects differently if they had unequal projected years (i.e., if Corporation A had a 5-year projection and Corporation B had a 7-year projection).j. Based on the scenarios in the “Capital Budgeting†simulation, pick two key variables whose values are less than certain. Consider different values for these two variables. How different would these values need to be to affect a decision you would make when using them? Given these different values, what other variables could mitigate a decision that might otherwise prove troublesome?
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
“Capital Budgeting†Simulation and Mini-CaseNote: This is an application of capital budgeting that integrates the projection of a basic cash flow and the computation and analysis of six capital budgeting tools.Your company is thinking about acquiring another corporation. You have two choices; the cost of each choice is $250,000. You cannot spend more than that, so acquiring both corporations is not an option. The following are your critical data:Corporation A:Revenues = 100K in year one, increasing by 10% each year.Expenses = 20K in year one, increasing by 15% each year.Depreciation Expense = 5K each year.Tax Rate = 25%Discount Rate = 10%Corporation B:Revenues = 150K in year one, increasing by 8% each year.Expenses = 60K in year one, increasing by 10% each year.Depreciation Expense = 10K each year.Tax Rate = 25%Discount Rate = 11%You must compute and analyze items (a) through (h) using a Microsoft Excel spreadsheet. Make sure that all calculations can be seen in the background of the applicable spreadsheet cells. In other words, leave an audit trail so that others can see how you arrived at your calculations and analysis. Items (i), (j), and (k) should be submitted in Microsoft Word.a. A 5-year projected income statementb. A 5-year projected cash flowc.
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