FUNDAMENTALS OF FINANCE - ASSIGNMENT REQUIREMENTS-
You work in the Finance division of the Richmond Manufacturing Company Ltd. The company is in the process of deciding whether or not to purchase a new plastic injection machine. Your company's Chief Financial Officer has asked you to prepare a report on this potential project, and to make a recommendation as to whether or not the company should proceed with the project.
Your report should include the following:
1. Calculation of the company's Weighted Average Cost of Capital.
2. Explanation of the circumstances in which it would be appropriate to use the company's WACC as the discount rate in evaluating the project.
3. Calculation of the Net Present Value of the project.
4. Calculation of the Internal Rate of Return of the project.
5. Calculation of the Payback Period of the project.
6. An explanation of which of these methods should be used to evaluate the project.
7. Your recommendation as to whether or not the project should proceed.
The following data should be used in calculating the company's Weighted Average Cost of Capital.
Capital Structure
Corporate Bonds
- The company's debt consists of corporate bonds with a face value of $1,000,000.
- The bonds mature in 9 years.
- They pay a semi-annual coupon at a coupon rate of 6.% p.a.
- Standard and Poor's have given the company a debt rating of 888.
Preference Shares
- The company' has 300,000 preference shares on issue.
- The preference shares pay an annual dividend of $1.49.
- They are currently trading for a price of $9.78.
Ordinary Shares
- The company' has 2,000,000 ordinary shares on issue.
- The ordinary shares have a beta of 1.4.
- The shares have just paid a dividend of $0.90. The dividend is expected to grow at a rate of 9% for the next 3 years, and after that it will grow at a constant rate of 4% p.a. in perpetuity.
Other Information
- The long term market risk premium is 9.4% p.a.
Attachment:- Assignment.rar