Weighted Average Cost Capital/TVM

Corporate Finance Management

Write a paper of 1700 words that addresses the following topic. Each topic MUST have Headings:

1). What are the pros and cons of each of these 3 methods of capital budgeting: Simple Payback, Net Present Value, IRR

2). How does use of each of the 3 methods adjust for projects of varying risk.

3). In your own words what is meant by cost of capital; would a firms CFO prefer a higher or lower cost of capital? Why?

The Firms balance sheet consists of $1 million of common stock. The stock recently sold for $2/share; its most recent dividend was $.50 and its dividends have been growing at 5%/yr.

The Firms balance sheet also has $1 million of preferred stock. The 9% dividend preferred stock has recently sold for $100/share

The Firms balance sheet also has $2 million of debt in the form of bonds.

These $ 1000 face value, 30 year bonds, have a 5% semi-annual interest rate and have been selling at $840 each; they INITIALLY were issued 10 years ago.

4). Calculate the firm Weighted average cost of the capital (WACC), from the above information given.

5). Calculate the net present value of all these future cash flows [cash inflows, cash outflows] for the two alternatives below, show your work by using Excel :

Here are the alternatives proposals for Question 5 above.

Proposal A:

$100,000 initial investment

4 years of annual savings of $30,000/yr.

Proposal B:

Initial investment $50,000

1st year savings 20,000

2nd year savings 40,000

3rd year savings 10,000

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