You have lots to do because the last guy was lazy and good for nothing. Don’t worry, you have his face on a dart board in your office. The president of the DWOTT has given you a fairly large ‘to do’ list and wants it ASAP. So you load up on Monster Energy drinks and coffee and settle in to work. It’s ok though, because you LOVE this stuff. Seriously. You do. Now that you are all jacked up on caffeine-let’s get it done!
First on the president’s list is an evaluation of where the firm is at the present. He has provided you with all the information you need to find the answers he wants. For starters, the capital structure for the past year of operations is:
Mortgage bonds $2,000
Debentures 1,500
Retained earnings 500
DWOTT paid a dividend of $.80 last year and expects them to grow 15% next year and into the foreseeable future. The stock currently trades at $36.70.
The president has asked for a thorough analysis. Keeping in mind DWOTT’scost of capital (use WACC above), what decision should be made regarding the projects above using each of the following tools(assume a 6% reinvestment rate):
What is each project’s payback period and which would you choose?
Timbuktu:
Neverland:
Middle Earth:
Choice & Why?